Two inspectors working for the US Food and Drug Administration (FDA), on a trip to a
factory late in January 2008, were stunned by what they saw. Workers at the plant were moving freely between blocks making antibiotics and other medicines. The FDA lays down stringent norms for operations at manufacturing facilities that export drugs to the United States, stipulating everything from complete isolation of different parts of a factory and deployment of personnel to dedicated air-conditioning, air filtration for bacteria and even down to how the clothes worn by personnel ought to be cleaned.
The idea, says J.C. Saigal, a 25-year industry veteran who was responsible for quality control at Piramal Healthcare, is that every plant "should do exactly what is written in the guidelines, and (record) what is being done in the plant".
But what the FDA inspectors saw on their two-week visit to Ranbaxy's Dewas plant in western Madhya Pradesh was a flagrant violation of the FDA's so-called current good manufacturing practices (cGMP). The violations were enough for the FDA, in September 2008, to ban imports of over 30 generic drugs manufactured at Dewas and another Ranbaxy plant at Paonta Sahib in Himachal Pradesh where, too, the US regulator had found
The FDA crackdown, which followed years of warnings and investigations and culminated with charges that Ranbaxy had submitted "untrue statements of material fact" relating to storage and stability testing, coincided with the Indian company's takeover by Japan's third-biggest drug maker Daiichi Sankyo. That sale, especially given Ranbaxy's troubles
with the FDA, was greeted by surprise and consternation.
The denouncement came on May 13, when Ranbaxy, India's secondlargest drug maker by sales, settled felony charges over falsification of data filings, manufacturing violations, and other false statements with the US Department of Justice (DoJ), agreeing to pay $500 million
, or Rs 2,800 crore.
The US is the biggest drugs market in the world and Ranbaxy, now owned 63.9 per cent by Daiichi Sankyo, makes 40 per cent of its revenues selling drugs there. Clearly, it wanted to put its dark past behind it.
On May 13, Arun Sawhney, Ranbaxy's CEO and Managing Director, made it clear in a statement to the Bombay Stock Exchange the company wanted to move on: "...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." .
$500 mn The amount Ranbaxy agreed to pay to settle felony charges in the US
"Ranbaxy is a different company today," added Sawhney, who joined the company just before Daiichi's takeover and was named as head of its global pharmaceutical business in January 2010. Different from when the company was controlled and run by the Singh brothers, Malvinder Mohan Singh and Shivinder Mohan Singh, when critics allege, cooking up data was part of its culture.
Dinesh S. Thakur, formerly director and global head for research information and portfolio management at Ranbaxy, gave glimpses of this in an interview to Business Today
. What began as a task in 2004 given by Rajinder Kumar, then Ranbaxy's head of research and development, to go through the company's portfolio of medicines, markets and production lines led him to uncomfortable findings.
"It was not a pleasant experience clearly finding out that the company you work for was making medicines that could make people potentially sick," Thakur said in a phone interview from the US. With his job made "untenable" within the company, he had to, like his boss Kumar, leave the company in 2005. He then opted to become a whistleblower in the DoJ case leading to the settlement announced May 13. Thakur will get about $48.6 million from the settlement amount.
Less than 10 days from that announcement, on May 22, Daiichi Sankyo made it clear
it thought it had been hoodwinked. It said it believed "that certain former shareholders of Ranbaxy concealed and misrepresented critical information concerning the US DoJ and FDA investigations," adding it is "pursuing available legal remedies".
The very next day, the Singh brothers, who sold their 30.91 per cent stake for some $2 billion, responded saying Daiichi Sankyo was in the loop all along. "Even between the signing and the time the deal (giving Daiichi majority stake) got closed, the FDA raised issues. They knew about it.
They knew everything that was FDA-linked and DoJ-linked," a combative Malvinder told BT
in an interview. Malvinder left Ranbaxy in May 2009, less than a year after the Daiichi Sankyo buyout and his successor, Atul Sobti, quit in August 2010 citing differences with the Japanese owners.Not Just the DoJ
Analysts do not see this dispute having any impact on the company as it is more of an issue between Daiichi and the Singhs. What they are more worried about is the decision of the Indian drugs regulator to examine all the dossiers and drug applications on the basis of which approvals had been granted to Ranbaxy in the past.
The Singh brothers sold their 30.91 per cent stake to Daiichi Sankyo in 2008 for $2 bn
Says Drugs Controller General of India G.N. Singh, "When the issue has been flagged, as a regulator it is our duty to see that whatever medicines have been produced here are of assured quality." He did not specify by when the review will be complete.
The findings of the review, depending on what they are, could have serious implications not just for India but for regulators across all the markets outside of the US. Going by last year's financials and despite addition to revenues from some onetime market exclusivity sales, nearly 60 per cent of Ranbaxy's total sales are in non-US markets: with the bulk of it spread over Europe (19 per cent), India (18 per cent) and Africa (eight per cent).
"This development holds significance on two accounts. One, it puts the Indian regulator in the spotlight as it will showcase its credibility and its sternness in taking actions. For Ranbaxy, it holds significance as the findings will be closely watched by its non-US regulators, which the company now needs to satisfy," says Kunal Mishra, Associate, institutional equity research, SBICAP Securities.
This worry is reflected on shares of Ranbaxy, which have shed more than 13 per cent since May 13 to around Rs 380. The May 13 announcement itself didn't have much of an impact on the stock since the $500 million charges had been factored in by the markets since December 2011 when Ranbaxy signed a consent decree with the FDA and had announced a provision of $500 million towards potential settlement costs with DoJ.
The other component is the involvement of the FDA. The task of the FDA is to see that the product is of good standard and quality and therefore grant approvals to a company to export the products from say India (in this case) to the US. It is here that some of Ranbaxy's cGMP issues still remain.
Ranbaxy has still to get its Paonta Sahib and Dewas units back on track for inspection and approval by the FDA so that it can resume supplies to the US from these facilities. It is currently working on this and has engaged consultants for this, as per the consent decree it signed with the FDA.
Until all issues with the FDA are resolved, "it will be difficult to see Ranbaxy making the same kind of margins and be as profitable as its peers," says Aditya Khemka, Associate at Nomura Securities. "If you see their EBITDA margins they have it now down to single digits. They did about seven to eight per cent in the latest quarter, which is lower than the peers doing 20 to 25 per cent EBITDA margins," says Khemka. EBITDA, short for earnings before interest, taxes, depreciation and amortisation, is a measure of operating profit.
What has not helped is the absence of Ranbaxy's generic version of Lipitor, a cholesterol drug of Pfizer. In November 2011, just after Lipitor went off patent, Ranbaxy launched the generic version in the US market only to recall it a year later after glass particles were found in its tablets. Production and sales of the drug have resumed late in March this year.
Integrity is vital in the health-care business where we are saving lives: Swati A. Piramal
Even if the pending issues with the FDA are resolved, the company - and indeed the broader Indian drug industry - has a bigger problem of convincing consumers and the medical fraternity that it lives up to its corporate tagline: 'Trusted Medicines. Healthier Lives'. "The unfortunate impression it has created is that noncompliance is pandemic in the Indian drug industry," Kiran Mazumdar-Shaw, Chairman and Managing Director at biotech drug maker Biocon says of Ranbaxy's problems.
Already, Jaslok Hospital in Mumbai
has issued an advisory asking doctors to avoid prescribing Ranbaxy drugs. Ranbaxy says it has invested over $300 million in recent years to install new technologies at its factories, old and new, and that it has doubled the number of people in the quality function to 2,000 from staffing levels in 2007 (total staff today is 14,600).
Ranbaxy has doubled the staff in its quality function to 2,000
The global quality head, Dale Adkisson, reports to CEO Sawhney and is a member of the company's executive committee. "Accidents can happen but what processes do you have to catch it early? That is the best distinction to make between the old Ranbaxy and the new Ranbaxy," says Rajiv Gulati, President, Global Pharmaceuticals Business.
Still, the journey ahead for Ranbaxy promises to be rough and expensive. "Until and unless Ranbaxy engages directly with its stakeholders, customers and doctors, it will take a while for the company to regain its reputation," says Y.L.R. Moorthi, professor for marketing at the Indian Institute of Management, Bangalore. "What is important to remember is that it is a competitive market out there and since Ranbaxy is not a monopoly in some of these markets it also runs the risk of losing some of its market to competitors."
Ranbaxy's mistakes, it seems, will hurt it for many years to come.