Business Today

Ranbaxy's new glow

Two years after it slammed into a US regulatory wall, Ranbaxy Laboratories, under its Japanese owners, is working the hard way to be back among the stars.

Shalini S. Dagar | Print Edition: July 25, 2010

For a long time to come, July 3 will remain a black day at Ranbaxy Laboratories, India's biggest drug maker by sales. That was the day in 2008 that US investigators hauled Ranbaxy into court in a probe of possibly falsified records that enabled the sale in the United States of drugs that did not meet quality standards.

The timing could not have been worse for Tokyo-based Daiichi Sankyo. Less than three weeks earlier, the third-largest pharmaceuticals company in Japan had bought out control of Ranbaxy, paying top dollar to the Singh family that controlled it. That July move by the US authorities and other news that followed sent Ranbaxy shares tumbling to a low of Rs 169.45 in four months flat.

The Ranbaxy Tripod
How the company is focussing on its three core markets.

    Through Project 'VirAAt', Ranbaxy is gunning for enhanced market share in its home market. It aims for market leadership by 2012 and that is evident in an increased focus on brands like Revital and Volini. Eighteen of Ranbaxy's brands feature among the top 300 brands in the industry.
    Globally, Japan is the second-largest pharma market after the United States. Generics penetration has just started to gain momentum as that country's health ministry has set a target of 30 per cent 'genericisation' by 2012. Ranbaxy Japan K.K., a wholly-owned subsidiary, will focus on generics filings.
    Despite regulatory troubles, the United States remains a key market for Ranbaxy, where it continues to invest. As of December 2009, it had 204 new applications on generic variants of patented drugs (market size today: $45 billion) filed with the US FDA, of which 138 have been approved.
That was less than one-fourth the price that Daiichi Sankyo, with big ambitions for off-patent or generic drugs, had paid for Ranbaxy. And with the cheque written out for the purchase close to $4 billion, it could only hurt more. That's the situation Amit Chander, Head of Investments for Health Care and Education at private equity firm Baring Partners, tries to highlight in a conversation on Ranbaxy's woes.

"Look at it from the buyer's point of view," he says. He is right. The buyer's point of view has remained largely absent from discussions on Ranbaxy's troubles — despite the Japanese company now owning nearly two-thirds of the Indian drug maker.

The reticent Japanese will not talk about their disappointment even in private. All that Daiichi Sankyo will comment on is how it took longer to find its stride in India. The pace of integrating Ranbaxy into its fold, says Tsutomu Une, Member of the Board and Senior Executive Officer for Global Corporate Strategy at Daiichi Sankyo, "has been slower than we would have liked." His response came to BT via a spokesperson, on e-mail.

But, inside Ranbaxy's headquarters in Gurgaon, a satellite city to the southwest of New Delhi, work is on determinedly to ensure that Daiichi Sankyo's money and efforts do not come to naught. The Japanese, says Atul Sobti, Ranbaxy's CEO and Managing Director, now for over a year, stood by their investment decision despite the troubles that erupted in the early days of the takeover. "It is critical that we now ensure that value is delivered," he stresses.

Delivering value to the new owners can be a tough ask in any acquisition, more so in the case of Ranbaxy. The July 2008 run-in with US Department of Justice investigators escalated into an import alert in September the same year by that country's drugs regulator, the Food and Drug Administration (FDA). For a company that made nearly a quarter of its revenues from the US, that was nothing short of a disaster.

But more bad news followed. When a call made on foreign exchange went wrong later that year, Ranbaxy had to book a loss of Rs 900 crore in 2008 (its financial year ends in December). For a company in transition, it was as if the bottom was falling out. For Sobti, who was chief operating officer before he took formal charge as CEO in May 2009, it was probably the toughest period of his 30-year career during which he has worked at companies such as Hero Honda and Xerox. "What should have taken off beautifully has had to go through its (share of doubts)...," he reflects.

Team Ranbaxy

  • ARUN SAWHNEY, President (Global Pharmaceutical Business): A pharma veteran of 30 years with stints at Bayer India, Hindustan Ciba-Geigy and Max-Gb, Sawhney is one of the senior members of the executive team.
  • OMESH SETHI, President and CFO: Another senior member, Sethi, with 21 years at Ranbaxy, heads the finance function. He is also involved with the firm's M&A activities, taxation, treasury and forex management.
  • SUDARSHAN K. ARORA, President (R&D): With over 30 years in drug discovery and development, Arora is a key senior hand at Ranbaxy. This double-doctorate is responsible in a big way for the drugs pipleline at the drugmaker.
  • BHAGWAT YAGNIK, Head (Global Human Resources): Yagnik is responsible for culture at an organisation with some 4,000 staff (a third of them overseas). With some 20 years behind him, Yagnik is seen as a pivotal member of Team Ranbaxy.
  • DALE ADKISSON, Head (Global Quality): A 26-year veteran with stints at majors such as Novartis and Bristol-Myers Squibb, Adkisson has global experience in quality control and assurance systems. He was earlier Senior Director (Quality Assurance) with Daiichi Sankyo, United States. He is Ranbaxy's go-to man in solving the run-in with the FDA.
  • HIROYUKI OKUZAWA, Head (Global Synergy Project): Okuzawa is currently leading the integration process between Ranbaxy and Daiichi Sankyo. Earlier, he managed the integration at Daiichi and Sankyo after the two merged in 2005.
Still, he adds, the difference from earlier is that there are no hidden risks waiting to blow up. (See Clear & Present Danger: Ranbaxy's US Saga.) And Ranbaxy's share price, back at over Rs 450, is reflecting the market's increased optimism about the company. Supratim Majumdar, Frost & Sullivan's pharma industry analyst, says: "Sales, profitability and margins are all up. There is clear strategy evident from the company's actions."

Some of that may be a feel-good factor from the company's latest quarter results. For the quarter to March 2010, Ranbaxy clocked its highestever consolidated quarterly revenues at some $542 million (Rs 2,493 crore) — a 65 per cent rise from the year-ago quarter. This performance was buoyed by the launch of generic valacyclovir, a herpes drug first marketed by GlaxoSmithKline as Valtrex and fetching it $2.2 billion in sales. In the US, this drug managed to gain a market share of 60 per cent. The launch of a copy of oxycodone, a pain management drug authorised by patent-holder Purdue Pharma, and a settlement with Boehringer Ingelheim, made for further one-time income.

The Cornerstones
Ranbaxy, slowly benefitting from what Daiichi Sankyo calls a "hybrid business model," is focussing its energies on three major markets: the US and Japan, which are the top two pharma markets in the world, and India.

It continues to invest in manufacturing in the US in spite of its regulatory troubles there. Sobti says he is planning three years ahead. "We have upgraded our manufacturing in the US, spending $30-40 million. We are now planning to upgrade packaging. We have almost 700 people there," he says. Ranbaxy rival Dr Reddy's Laboratories has around 300 people in the US.

Big Bets at Ranbaxy
MoleculeInnovator (Brand)Market SizeStatusYear
ValacyclovirGSK (Valtrex)$1.3 billionLaunched2009
Esomeprazole^AstraZeneca (Nexium)$5.5 billionSettled2009-14
TamsulosinBI*/ Astellas, (Flomax)$1.2 billionSettled2010
AtorvastatinPfizer (Lipitor)$8billionSettled2011
PioglitazoneTakeda (Actos)$3billionSettled2012
^Including supply agreements beginning 2009 through 2014 & 180 days exclusivity in 2014. *Boehringer Ingelheim/ Astellas

Like valacyclovir, Ranbaxy has several other potential drugs in the pipeline. The company has made 204 regulatory filings with the FDA for approvals to sell new generic drugs. Of these abbreviated new drug applications or ANDAs, as they are called, 138 have been approved. Of the pending applications, 13 are so-called Para 4 applications, which, if approved, could allow Ranbaxy to market the drugs while the patent is in force.

This 180-day exclusive marketing window makes for rich pickings, but the Para 4 approval process is litigious, expensive and time-consuming. In the case of Ranbaxy, the market for such drugs at innovator prices today is a rich $24 billion. Two big opportunities: generic versions of Pfizer's Lipitor and AstraZeneca's Nexium. Lipitor, or atorvastatin, is a cholesterol buster and Nexium, or esomeprazole, is prescribed for heart burn and reflux of the esophagus. (See Big Bets at Ranbaxy.)

Some point out that the upside may take some doing to translate into revenues. Online brokerage Sharekhan recently pointed out that filings for Lipitor and, possibly Nexium, had been made from Ranbaxy's factory in Paonta Sahib, Himachal Pradesh, which has since September 2008 been blocked by the FDA for exports to the US. "...there remains an element of risk on Ranbaxy monetising these exclusivities. Even as the management remains extremely confident of successively monetising these molecules, the timely launch of the same will hold the key," Sharekhan wrote this May.

Even so, huge generic opportunities beckon, for instance in Japan, a $80-billion drugs market. Generics there account for a mere 14 per cent of the market by volume against 72 per cent in the US. That is all set to change as Tokyo, aiming to lower health care costs, pushes for increased "genericisation," targeting 30 per cent by 2012. Already, Daiichi Sankyo has set up a unit, Daiichi Sankyo Espha, to focus on generics in Japan on the lines of the Novartis-Sandoz model, a successful innovator-generic drug maker combination. Ranbaxy will start developing the pipeline for Espha once quality issues with the FDA are sorted out.

Daiichi Sankyo is also working on details of beefing up Ranbaxy's discovery division through new molecules. "Japan is a three-to-five-year story for us," says Sobti. "There is phenomenal synergy between Daiichi Sankyo and Ranbaxy. We are one of the best networked companies. Our in-house services such as logistics (of exporting to and marketing in 44 countries) are world-class," he says by way of example. In addition, Ranbaxy's strong marketing presence in Romania, Brazil, Russia and South Africa will help Daiichi Sankyo launch its patented products there.

Ranbaxy, too, has introduced Daiichi Sankyo's products in some markets, starting with India. For instance, in April 2009, Ranbaxy began marketing Daiichi Sankyo's flagship blood pressure drug olmesartan (brandname: Olvance) in India. Soon afterwards, both companies announced partnerships in Romania, Mexico and Africa. The latest: Introduction in India of prasugrel, a drug used in treating heart ailments, from the Japanese firm's portfolio.

Hybrid Leg-up
The second wave of synergy benefits between Daiichi Sankyo and Ranbaxy is related to manufacturing outsourcing between Japan and India, especially in generics. "There is good scope for Ranbaxy to become the production and supply base for Daiichi Sankyo once the quality issues are resolved. It can be an effective and globally competitive strategy," says D. S. Brar, Chairman, GVK Biosciences, and, until 2004, the top man at Ranbaxy.

India, as a market, is the third cornerstone for Ranbaxy. By 2020, it is forecast to grow to $30 billion from the current $8 billion. Ranbaxy is aiming for the top slot here in two years (Abbott-Piramal, after its recent takeover of Piramal Healthcare's domestic formulations business, is No. 1 in India with a near seven per cent market share, followed by Cipla and then Ranbaxy). Ranbaxy has shifted its India headquarters to Mumbai from Gurgaon, hired 1,500 people, and created 10 business units.

Sobti has told his team that he is ready to accept a drop in operating margins for the first year, because of this. In effect, what Daiichi Sankyo and Ranbaxy are trying to do is copy-book strategy. Try to straddle (and balance the risks and opportunities) two widely different parts of the $800-billion global pharma market: Patented, expensive medicines, on the one end, and generic, competitive drugs, on the other. Only a few like Novartis-Sandoz have succeeded with this model but several have tried it — the latest being Abbott-Piramal Healthcare.

The so-called innovator companies, or the patent owners, are stressed about their empty pipelines of blockbuster drugs as costs of drug discovery become unsustainable. The generics industry faces cut-throat competition but has two factors working for it. One, some $80-billion worth of drugs that will lose patent protection in two to three years and are waiting to be copied. (Of course, the figure will come down since generics are cheaper.) And, two, the push by governments the world over — the US, Europe and Japan, as also fast-growing markets such as Brazil, Russia, India, China, Turkey, Mexico and South Korea — towards cheaper, generic drug equivalents.

"Ranbaxy is like a diamond, already with a considerable value. And together with Daiichi Sankyo, we believe that Ranbaxy's strengths could be further boosted and that the diamond will sparkle even brighter," says Une, the Daiichi Sankyo board member. "The brighter the diamond is, the more valuable the entire Daiichi Sankyo Group will be." Already, the Japanese firm is benefitting. In the year to March 31, its sales rose 16 per cent in the US, 28 per cent in Europe and some 76.4 per cent in other countries (not including India), some of which the company credited to Ranbaxy.

While the current stance of governments towards generic drugs presents a near-perfect setting for Ranbaxy, many of its plans are hobbled by its poor record of compliance. Yet, Sobti, known for his candour and ability at suasion (Ranbaxy's former human resources and legal heads were persuaded to join back by him despite the current troubles; see Team Ranbaxy) may be the best helmsman to steer Ranbaxy out of its regulatory mess. Says one pharma industry veteran on condition of anonymity: "Sobti should be able to handle the quality and compliance issues. At least, he carries no baggage or arrogance of the past."

Internally, hundreds of shocked Ranbaxy employees appreciate the townhall meetings and open house sessions Sobti has held at manufacturing sites and overseas operations. Says the CEO: "Nobody was asked to leave" at the plants at Paonta Sahib or Dewas (in Madhya Pradesh) affected by the FDA probe, or in the US team. Industry experts are backing Ranbaxy, too.

Much of Ranbaxy's future, suggests ex-chairman Brar, depends on how it plays out the strategy its Japanese parent is crafting for it. Chander, the Barings executive, reckons he is not worried for Ranbaxy in a five-year time frame. "The Japanese pretty much invented quality in manufacturing. I would be very surprised if compliance issues continue for long," he says.

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