New York: How will Ranbaxy’s $500 million fraud settlement affect its business in the United States? The settlement is the largest in history involving a generic manufacturer and drug safety, according to the US Justice Department. Despite the reputational damage and financial hit Ranbaxy has taken, resolving the lawsuit puts the company on firmer ground to start reviving sales to its biggest market, say analysts.
In an affirmative sign, Ranbaxy shrugged off early losses after Monday’s ruling to steadily climb 1.75 percent to Rs 463.45 on Wednesday on the Bombay Stock Exchange after analysts said the settlement of the US lawsuit clears a big overhang on the stock.
“With this settlement the lengthy lawsuit is over and since the amount in terms of penalty is the same as earlier provided by the company, it’s positive in the long-term,” said Sarabjit Kour Nangra, VP Research-Pharma, in Angel Broking.
Ranbaxy had already set aside $500 million in anticipation of the penalties. The company is paying $150 million in a criminal fine and forfeiture, with the remainder going to settle civil claims brought by the federal government and all 50 US states. Former Ranbaxy executive Dinesh Thakur who alerted the federal government to the problems will receive $48.6 million in compensation for his role as a whistle-blower.
A Ranbaxy office building is pictured in the city of Mohali. Reuters
Due to the federal investigation, Ranbaxy has not exported drugs from the two tainted Indian factories, in Paonta Sahib in Himachal Pradesh and Dewas in Madhya Pradesh, to the US since 2008. Now that the case has been settled, Ranbaxy, a subsidiary of Japanese pharmaceutical company Daiichi Sankyo, will start the onerous process of winning new FDA approvals for its facilities in Paonta Sahib and Dewas.
According to industry experts, Ranbaxy will do everything to press for big cost savings by moving drug production from its US subsidiary Ohm Laboratories Inc back to India. Ranbaxy still needs inspections from the FDA before resuming exports from the Indian factories
“It is a cumbersome process because FDA inspectors will have to oversee the factory inspections in India and target products for testing,” a high-level official within the US pharmaceutical industry, told Firstpost.
“FDA’s foreign inspection will also require authorisation from the Indian government. Things could move faster if Ranbaxy gives inspectors unfettered access to its facilities.”
According to an average of five analysts surveyed by Bloomberg, Ranbaxy may be able to cut costs by 15 percent once it starts selling the products made in the Indian plants to US clients.
Moving production back to India is crucial for Ranbaxy, which reported a second steep drop in sales in the three months to March, to revive growth in its biggest market.
“It’s better to shift to India, low-cost, high-volume products,” Centrum Broking analyst Ranjit Kapadia told Bloomberg. “They will be able to restart production for the US market from both these facilities and that will improve revenue.”
Wake-up call for Indian pharma
Kiran Mazumdar-Shaw, the founder of Biocon, India’s first and largest biotech company, wrote in The Economic Times that the Ranbaxy issue proves that an isolated case can undo the painstaking gains made in setting high-quality standards in India, which has the most number of FDA-approved plants outside the US.
“The hefty fine that Ranbaxy Laboratories will pay as part of the drug safety settlement in the US threatens to seriously erode its reputation that can take years to regain. This is particularly sad as Ranbaxy has been a leader and stalwart among Indian generic drug makers that have, over the decades, built a reputation of supplying good quality medicines at reasonable prices to patients globally. This is thus a wake-up call for the Indian pharma industry as a whole,” wrote Mazumdar-Shaw.
“A failure on our part to set standards of quality and compliance for both products and services that are at par with the best in the world can cause irreparable damage to Indian companies’ long-term business prospects in the US market,” added Mazumdar-Shaw, who at the age 25 created a biotech company by working out of the garage of a rented one-bedroom house in Bangalore.
Biocon is now a $1 billion operation and in stage-three clinical trials on both a cancer treatment drug and a variety of insulin that can be taken orally, a product that has long been the global pharmaceutical industry’s “holy grail.”
Clearly, the US lawsuit suit shows Ranbaxy has problems with quality control. But hopefully it has learnt its lesson and will clean up its act. In a statement, Ranbaxy noted that the settlement involved conduct that occurred several years ago.
“While we are disappointed by the conduct of the past that led to this investigation, we strongly believe that settling this matter now is in the best interest of all of Ranbaxy’s stakeholders; the conclusion of the DOJ investigation does not materially impact our current financial situation or performance,” said Arun Sawhney, the chief executive of Ranbaxy.
“We are pleased to continue bringing safe, effective and quality medicines to market for the benefit of consumers in the US and other parts of the world,” he added.
Despite all the noise, the overwhelming majority of generic drugs are as safe and effective as their brand-name counterparts. Brand-name companies have also had their share of quality problems: Johnson & Johnson famously had major problems with its production of Tylenol. It is operating under a consent decree because of problems at manufacturing plants.
In 2010, British drugmaker GlaxoSmithKline paid $750 million in criminal and civil fines to resolve a federal whistle-blower suit that highlighted problems at a factory in Puerto Rico.
There is another key takeaway from the Ranbaxy saga which highlights the role of a strong regulator. We have seen that the FDA has been willing to pay money to whistleblowers in order to catch malpractices and that’s a very strong message. The US regulator is widely respected, and companies know that they will face heavy fines and even larger losses in market share if they do not address quality. Unfortunately, India’s drug regulator has not generated the same respect.
In May last year, the Indian government’s Parliamentary Standing Committee on Health and Family Welfare presented a 118-page evaluation of the Central Drugs Standard Control Organisation which eviscerated it for corruption, and concluded that many expert health opinions about the safety of drug products “were actually written by the invisible hands of drug manufacturers.”