The pills that saved Ranbaxy

THE 12-HOUR FLIGHT FROM Washington, D.C., to Brussels on Nov. 30, 2011 is something that 56-year-old Arun Sawhney, Ranbaxy Laboratories’ CEO and managing director is unlikely to forget. He’d waited all day at the Washington offices of Zukerman Spaeder, Ranbaxy’s attorneys, for news from the U.S. Food and Drug Administration (FDA) on the launch of the generic version of Pfizer’s epic cholesterol-buster Lipitor. The verdict still hadn’t arrived when, at 5:49 p.m., he boarded United Airlines flight 905 for Brussels, en-route to New Delhi. For Sawhney, “It was like an exam. You believe you will pass, but you are still anxious. Nothing is certain till the results are in hand.”

He had moved into the corner room barely a year earlier, and knew the stakes were huge. It wasn’t just about launching Lipitor’s generic drug—called atorvastatin calcium in the U.S.—but also clinching the 180-day exclusivity. (A company that is the first to file a generic version of a patented drug to the FDA and successfully defends its case against the innovator company, wins a 180-day monopoly for selling it in the U.S.). In anticipation, limited quantities of atorvastatin had already been synthesised and the distribution machinery kept primed. As its only retailer for 180 days, Ranbaxy could charge nearly 70% to 80% of the price of Lipitor, which had fetched Pfizer $7.8 billion (Rs 43,165.2 crore ) in sales in the U.S. ($12 billion globally) that year. Besides serious bragging rights, this could transform Ranbaxy’s fortunes, particularly in America, where it had been laid low since 2008 because of a raft of regulatory issues with the FDA and Department of Justice.

The FDA’s nod came when Sawhney was mid-air, around 7 p.m. eastern standard time. On powering up his BlackBerry in Brussels, he saw its inbox overflowing with congratulatory messages. When he reached Delhi around midnight, his wife and two kids were waiting with a cake—they’d heard the news on TV. The next day (December 1) Ranbaxy’s share price gained 2.1% on the Bombay Stock Exchange, while that of its Japanese majority owner Daiichi Sankyo saw a 3.1% jump to ¥1,416 (Rs 1,005.36) on the Tokyo Stock Exchange.

Five months later, Sawhney savoured another high when he launched Synriam, an anti-malarial drug. It’s the first ever new chemical entity (which, shorn of industry speak, means an original medicine) to come from India.

The launches of atorvastatin and Synriam, among other things, suggest a turnaround in Ranbaxy’s fortunes after a messy four years of regulatory battles (more of that later). Sawhney argues that they are at a moment of “inflexion” not only because many of the past legacies are behind them, but also because of Ranbaxy’s Japanese owners. In June 2008, Malvinder Mohan Singh and Shivinder Mohan Singh, grandsons of founder Bhai Mohan Singh, sold 64% of Ranbaxy to Daiichi Sankyo for $4.6 billion. Sawhney says, “While we continue to be genetically entrepreneurial, we also have Japanese investment and guidance to back it. It is a new Ranbaxy.” There’s also a new Sawhney—since he became CEO and MD, he has grown a beard. He has also been rewarded: He continues at his post till 2017.

His boss, Tsutomu Une, the company’s non-executive chairman, says the new Ranbaxy is all about making people realise that they are now working in a new organisation with a new mindset, taking pride in the company, and always focussing on patients: “I keep telling the employees that if they focus on the safety of the patients and not on the stock markets, past mistakes will not recur.” He emphasises “patient” many times in the conversation.

Employees, who initially resisted the Japanese, are coming around to the view that Daiichi’s influence is reassuring, even though most key decisions are now taken by the Japanese. “It is all about talking to your neighbours, keeping the channels of communications open with different departments, better systems and processes, etc. That was really not happening earlier,” says an insider. “It’s true that family-run businesses can take decisions much faster than a professional organisation,” says Une. “But is it always a good decision? That is something that I often wonder.”

Yet, Ranbaxy could trip again. In order to win the FDA back, it has entered a ‘consent decree’ (an order issued by a judge that expresses a voluntary agreement by the participants in a law suit). Its terms are highly demanding and any violation could lead to very heavy fines. On January 25, the decree was approved by the courts. Two days later, Ranbaxy’s shares fell 7%. The real concern, says Sarabjit Kaur Nagra, pharmaceutical analyst at Angel Broking, a trading portal, is that its core generic business—as opposed to first-to-files such as atorvastatin that provide a temporary spike in earnings—has not been doing well. Its operating margins, at 8% to 9%, are far lower than its competitors: Sun Pharmaceutical Industries’ 40% or Cipla’s 20%. That shows up in its valuation which is lower than Sun’s (almost by a third) and Cipla’s, though Ranbaxy is far bigger than either.

ON A MUGGY AUGUST day in 2002, Ranbaxy set the ball rolling by filing an Abbreviated New Drug Application (ANDA) with first-to-file status in the U.S. to launch a generic version of Lipitor. It simultaneously challenged Pfizer’s existing patent, both mandatory steps to launch a generic.

Taking on the world’s largest pharmaceutical company and challenging its largest-selling drug in various jurisdictions (countries) was highly expensive and time-consuming. It also required a huge leap of faith. Ranbaxy not only had to demonstrate that the various patents covering the original drug had run their course or were invalid, but that its proposed drug was the biological equivalent of the original and could achieve a similar level of concentration in the blood. Though Ranbaxy had already launched a few blockbuster first-to-files in the U.S. by then, battling Pfizer on Lipitor was another matter altogether. But given Ranbaxy’s ambitions, it was a reasonable risk.

Though Ranbaxy refuses to divulge details of the expenses incurred in its legal battle with Pfizer, Krishna Sarma, managing partner at New Delhi-based Corporate Law Board, estimates hundreds of millions of dollars was spent. Partners at top U.S. law firms charged around $700 to $800 per hour in those days (2002). Today, it’s around $1,500 per hour. Ranbaxy was represented by Knobbe Martens Olsen & Bear, a California-based intellectual property law firm, and Zuckerman Spaeder, which would later defend the International Monetary Fund’s Dominique Strauss-Kahn against charges of sexual assault of a hotel maid.

In the summer of 2008 the two companies reached an out-of-court deal which allowed Ranbaxy to launch atorvastatin in the U.S. on Nov. 30, 2011 (thereby extending Lipitor’s unopposed reign by 20 months) and in seven other countries, including Canada, Belgium, Australia, and Sweden, when patents expired. Better still, the settlement allowed Ranbaxy to launch generics of two more versions of Lipitor that go off patent in 2016 and 2017 without going through the expensive legal process again. Ranbaxy’s then head, Malvinder Singh, in a statement said the settlement “provides certainty and visibility to the launch of Ranbaxy’s generic atorvastatin with a 180-day market exclusivity in the U.S. and an early entry in other markets”. He would soon be proved wrong.

Back in August 2005, a whistleblower had alleged that Ranbaxy had committed extensive fraud in its generic drug applications. The claims raised serious questions about the manufacturing and safety of Ranbaxy’s drugs. The FDA knew the exact batch number of the medicines, the names of the supervisors who had signed quality assurance papers without swiping their cards, etc. In 2006, the FDA issued its first warning letter to Ranbaxy.

The FDA continued its investigations and in September 2008 blacklisted two key Ranbaxy factories—Paonta Sahib (including Batamandi) in Himachal Pradesh and Dewas in Madhya Pradesh. Soon after, the FDA halted shipment of all Ranbaxy medicines into the U.S. thereby blocking its most important market overnight. All this hit Ranbaxy’s atorvastatin plans hard because it had planned to make it at Paonta Sahib, Dewas, and Gloversville (which too was hit by a warning letter). Four months later, the U.S. drug regulator invoked the “application integrity policy’’, which meant that it would not grant any new approvals to the Paonta Sahib factory.

Meanwhile, in July 2008, the U.S. Department of Justice began investigating Ranbaxy for flouting norms of HIV drugs being imported under a presidential scheme. Moreover, two U.S. congressmen launched an investigation into whether the “FDA had allowed drugs made by Ranbaxy to be sold in the U.S., despite knowing that it had approved them based on fraudulent information and violation of good manufacturing practices, etc.”

On March 12, 2009, Ranbaxy’s share price hit Rs 134, the lowest in its history. By June that year, it had been evicted from the 30-stock Sensex. Then, in 2011 (calendar year), the company posted a mammoth loss of Rs 2,883 crore and its new owners slashed its net income by 63% to ¥26 billion in March 2012. Earlier, in May 2009, it had to write off $3.8 billion, for which Daiichi’s then president and CEO Takashi Shoda had to apologise to shareholders in Japan. The Japanese, it was whispered, hadn’t done their due diligence.

Till the mid-2000s, Ranbaxy was India’s showpiece pharma company. Under the late Parvinder Singh (the founder’s son) and former CEO Davinder Singh Brar (1999 to 2004), it had transformed itself from being a company that made copycat drugs to one which invested in research and pushed overseas. Between 1997 and 2004, it had launched 96 generics in the U.S., built factories all over the world, hired international talent, grew its top line 36% annually, and made analysts very happy. It was seen as India’s first pharma MNC-in-the-making. But as events unfolded from 2008, it was clear that the once proud Ranbaxy was on a downward spiral.

MOST INSIDERS Fortune India spoke to say that between July 2008 and November 2011, the company’s fate hung in the balance. “There was a lot of anxiety inside the company,” says one who asked not to be identified. There was tremendous pressure from the Japanese to fix matters. While the Lipitor settlement made it an attractive target, Daiichi hadn’t paid a premium to buy Ranbaxy just for that—it believed it would storm the U.S. That idea suffered a huge blow. It also created an element of mistrust within the company, with the new owners feeling they had been cheated. “Although we knew about the correspondence and warning letters between the FDA and Ranbaxy during the negotiations, we were not expecting the kind of response that came from the U.S. regulator. It took us by surprise,” acknowledges Une.

The Japanese took it upon themselves to clear the mess. With Une taking lead, Daiichi appointed a team which included, among others, Lavesh L. Samtani, a California-licensed lawyer and legal head of U.S. operations, Rajbir Sachdev, Ranbaxy’s legal head in India, Venkatachalam Krishnan, regional director, U.S., and former CEO, Atul Sobti. (Sobti was later replaced by Sawhney. He wasn’t the only senior exit. Besides Malvinder Singh who preceded Sobti, those who left the organisation included the chief financial officer, Omesh Sobti, global human resources head, Bhagwat Yagnik, and vice president, global quality and analytical research, T.G. Chandrashekhar.)

Remembering those days, Sawhney says he would be in the U.S. at least twice a month. Une shuttled between Japan, the U.S., and India. Between the two of them they would meet FDA officials, lawmakers, their legal counsel, etc. Ranbaxy was again represented by Zuckerman. Three Ranbaxy employees—Dale Adkisson, Krishnan, and Sawhney—who were made parties to the case were represented by law firms Hogan Lovells and Foley & Larnder. Insiders say Ranbaxy has spent nearly $125 million in legal expenses so far.

Sensing that Ranbaxy’s position was weak, Pennsylvania-based Mylan, the second-largest American generic manufacturer launched its own attack. It sued the FDA in May 2011 for not taking a decision on Ranbaxy’s atorvastatin. Mylan wanted the FDA to terminate Ranbaxy’s claim because of “false and unreliable data” from its Paonta Sahib and Dewas sites. Judge James Boasberg of the District Court in Washington, D.C., dismissed Mylan’s case in May 2011, noting that it had neither the first-filer status nor a tentative ANDA approval for Lipitor to challenge Ranbaxy’s claim. Meanwhile, Pfizer stated that it could win a 180-day extension for Lipitor because no other generic player had a first-to-file status and could not come into the market without entering into any settlement with it.

“We were not dealing with one but multiple challenges at the same time: from competitors, court cases, approvals from the FDA, etc., as well as assuring customers of adequate and timely delivery. The only solution was to be totally transparent about the deals so that all the stakeholders knew what was going on,” says Sawhney.

Sensing that the FDA would be opposed to allowing atorvastatin made in Paonta Sahib, Dewas, or Gloversville, the main thrust of Ranbaxy’s plea was that it be allowed to shift manufacturing to new sites—Ohm Laboratories in New Jersey (an existing subsidiary) and a new plant coming up in Mohali near Chandigarh. Ohm’s track record was particularly untainted: In 2009 and 2010 the FDA had allowed two other first-to-files, valacyclovir (a generic version of GlaxoSmithKline’s Valtrex for herpes in 2009) and donepezil (generic of Eisai’s Aricept for Alzheimer’s), from there.

Ranbaxy also had a backup plan. It entered into a secret deal with Teva Pharma, the world’s largest generics company (and Ranbaxy’s competitor otherwise), to use Teva’s FDA-approved sites in case its plea was denied. In turn, it was willing to pay $350 million. Though Ranbaxy finally didn’t use Teva’s site, it shared profits from the sale of atorvastatin during the 180-day period. Citing confidentiality, Ranbaxy refuses to disclose the nature of the deal. All Sawhney says cryptically is, “We wanted to monetise the assets one way or the other after having produced a generic alternative to Lipitor. It could not be a zero sum game—full profits or nothing—during the 180-day window.” Currently, Teva markets atorvastatin.

Finally, when the FDA nod came to make atorvastatin at Ohm (the Mohali permission came in April), Sawhney says there was no sigh of relief. “Just a sense of excitement of having achieved what we had set out to do.” His wife told him she was glad that he’d not have to visit the U.S. that often.

Between Dec. 1, 2011, and May 29, 2012, Ranbaxy raked in a cool $600 million on atorvastatin sales, with a market share of almost 50%. In the early days, nearly everything else that Ohm was making was diverted elsewhere to create capacity for atorvastatin. Despite the 95% fall in price from May 30, Ranbaxy continues to enjoy 20% market share with only three new atorvastatin players, Apotex, Mylan, and Sandoz, having received FDA approvals. Analysts Chirag Daghi and Gajan Borana of ICICI Securities say Ranbaxy’s share is unlikely to come down even with the entry of new players because of its competitive pricing.

But the court battles are far from over. The final report of the U.S. Department of Justice’s investigation into the HIV drugs matter is yet to be tabled. Ranbaxy has put aside $500 million as a contingency for fines the Department of Justice may impose. Then, this July, five big U.S. retailers—Walgreen, Kroger, Safeway, SuperValu, and H-E-B—filed an antitrust lawsuit against Pfizer and Ranbaxy accusing them of conspiring to delay sales of generic versions of Lipitor. Though they continue to sell Ranbaxy’s drugs, they alleged that there was an “overarching anticompetitive scheme’’ to keep the drug off the market until Nov. 30, 2011, 20 months after the original patent expired. The impact was immediate and Ranbaxy’s stock fell by 2.7% on July 9, 2012. The case is still pending in the District Court of New Jersey. Sawhney believes such events happen in the course of business. “We have to deal with this; there is nothing to fear.” Perhaps having a giant like Pfizer on the same side for a change is a great source of comfort.

MEANWHILE, THOUSANDS OF MILES AWAY, Ranbaxy was limbering up for a battle against another equally deadly enemy—malaria. Synriam, a one-tablet-a-day, three-day regimen, priced at Rs 130 for the entire course, was first incubated in 2003. India accounts for 75% of the 2.5 million reported cases of malaria in South East Asia every year; it is also the biggest killer of children below 5.

Malarial parasites have developed a resistance to existing drugs such as chloroquine and a different combination therapy is needed to kill them. It is here that Ranbaxy’s fixed-dose combination of arterolane maleate and piperaquine phosphate (both salts) provided the answers. While arterolane quickly kills the parasite in the blood, providing fast relief from symptoms such as fever and chills, piperaquine has a longer-lasting effect, killing the residual parasites and preventing recurrence.

Synriam too had its share of drama. In 2007, Switzerland’s not-for-profit Medicines for Malaria Venture, which was part-supporting the project, decided to back out, citing changes in priorities. Synriam’s Phase II trials were commencing just then in Thailand, Tanzania, and India. Fortunately, the Department of Science and Technology, Government of India, stepped in with the necessary funds.

Sawhney says Synriam is a game changer for Ranbaxy. Not just from a business perspective—it notched sales of
Rs 1 crore in the first month and will soon be launched in Asia, South America, and Africa—but also from the confidence it has generated within the company: “Before Synriam, nobody could believe that India could ever produce a new molecule entity. Today, that perception has changed.”

Some analysts aren’t convinced. Angel Broking’s Nagra believes that higher sales of Synriam are unlikely to change Ranbaxy’s fortunes. “The more important thing is how many drugs are there in its first-to-file pipeline.”

THAT STATEMENT CAPTURES RANBAXY’S predicament—it’s still judged by its U.S. business. And that’s where the consent decree has spooked shareholders. Has the company entered into a Faustian deal to re-enter the U.S.?

A consent decree is a set of dos and don’ts dictated by the FDA which allows companies to resume sales in the U.S., but carries stringent penalties if the dictates aren’t followed. Ranbaxy’s been handed a 52-page book containing the strictures. In a written statement, Tim West, assistant attorney general for the Justice Department’s Civil Division, which works as the FDA’s legal arm, said, “The action against Ranbaxy is groundbreaking in its international reach. It requires the company to make fundamental changes in its plants both in the U.S. and in India.” The scope of the consent decree which will be in force for a five-year term till January 2017, extends to all of Ranbaxy’s factories except Ohm and Mohali.

According to the decree, Ranbaxy has to appoint a third party from the FDA’s panel of firms to audit its plants in Dewas, Batamandi, Paonta Sahib, and Gloversville (now closed) before it opens up for final inspection to the regulator; authorise an individual to be responsible for all quality control and assurances such as safety, identity, strength, and set up an office of data reliability to conduct pre-submission audits for all applications; besides, of course, adhering to good manufacturing practices.

The trouble is the record of managing consent decrees isn’t cheery in the pharma sector. Between 1993 and 2003, of the 16 companies that entered decrees, five were sold. Even biggies such as Wyeth and GlaxoSmithKline have shut plants under consent decrees. A case study on Abbott shows that the cost of a decree was far higher than the FDA fine—$100 million versus $1 billion over five years.

Here’s how the math works for Ranbaxy. It will pay $15,000 for each day of violation of the law or the decree at the facilities covered under it, and an additional sum of $15,000 for each overall violation of the law or the decree. Unlike what’s been widely reported, the FDA isn’t imposing any fines on Ranbaxy.

That’s not all. It has had to give up its 180-day exclusivity right on three drugs, the names of which have been withheld under the confidentiality clause of the decree. That may mean forgoing at least $200 million in revenue, says a Kotak Securities report. The report claims that one of the drugs may be diabetes pill Actos (the patent holder is Takeda Pharmaceuticals of Japan), which had global sales of $4.7 billion in 2010. Another report from brokerage Edelweiss estimates that the potential loss of revenue to Ranbaxy from the loss of exclusivity could be between $300 million and $450 million.

This puts Ranbaxy at risk. Over the years it’s built a model where 70% of its core products bring in barely 2% of profits and first-to-files bring in the rest. Senior executives in the know say that with the ban on Dewas, Paonta Sahib, and Batamandi, these expensive plants built to FDA’s specifications are now a liability. “Even if Paonta Sahib and Batamandi were to cater to the needs of the European markets (where the margins are slightly higher), they would still find it difficult to make profits because they would be left with a lot of excess capacity,” says a senior company official on condition of anonymity.

In the expectation that it would launch atorvastatin in 2009 (as originally envisaged), Ranbaxy had taken a number of plants on high-lease rentals and entered deals with others for contract manufacturing. Because of the delay, it had to make payments to them without using their services. “That ran into crores of rupees,” says another insider.

Une says Ranbaxy has no choice but to make the decree work in letter and spirit. “The FDA’s focus is on the patient’s welfare and not helping Ranbaxy.” According to him, the decree is, in some senses, a fresh start and will help in “cleaning up” the company. “Employees should be under no illusion that they are now committing to the future of the company,” adds Une. Perhaps, because he represents Ranbaxy’s biggest shareholder, the impression he conveys is that Daiichi’s investment in Ranbaxy is still at risk. His sentiment is more caution, less bravado.

Sawhney focusses on what Ranbaxy has done since the decree was enforced—like setting up an office of data reliability, appointing Manjeet Bindra as the reliability officer in the U.S. and two U.S. consultants to audit the factories, all dos under the decree. He also says the FDA has allowed them to file for two ANDAs already, a sign that things are moving. “The general fear was that it [the decree] would become an impediment. But our filings are going through,” says Sawhney, only to add: “There are still concerns about the decree. They will get accentuated if we fail, but dispelled if we succeed.”

SO WHERE DOES THIS leave Daiichi’s Ranbaxy? Much will depend on how things move here on. On the face of it, Daiichi doesn’t want to tamper with the way Ranbaxy is structured. Une says there are no plans to delist, even if that means shielding Ranbaxy from the glare of the markets in uncertain times. He argues that it’s an Indian-origin global company which draws support from the government, customers, and stakeholders. “Why should we devalue Ranbaxy?”

He also never stops emphasising Ranbaxy’s import as an innovator company because the success of any generics company in future will not depend on being the lowest cost producer, but being able to differentiate its generic drugs from those of its competitors. So, Ranbaxy and Daiichi could even collaborate on new drug development, especially for diseases such as diarrhoea and tuberculosis which are more prevalent in poorer countries. Then, in regions such as Africa and Eastern Europe where Ranbaxy is more dominant, it will use its muscle to sell drugs made by Daiichi and itself; the reverse will apply in countries where Daiichi has a stronger presence (Japan, Venezuela, etc.). Regions where neither has any substantial presence will be developed jointly after discussions between the two managements.

For the U.S., at the moment, the pipeline is full: 66 generic applications are awaiting FDA rulings, of which 13 are first-to-files. But given what’s happened, it’s unlikely that Ranbaxy will re-emerge as a first-to-file champion. Indeed, inside the company, the discourse is moving towards the emerging markets. Sawhney says in the next five years “65% of the growth in pharma will come from the emerging markets and Ranbaxy is best placed to gain from that”. In Une’s words, Ranbaxy will be moving from the “G8 [cluster of rich nations] to the G20 [rich countries plus emerging markets]”. In preparation, Ranbaxy is altering its portfolio, reducing costs, etc.

Some employees say their company is slowly being reduced to the status of a low-cost manufacturing arm of a Japanese innovator. They allege its beginnings were visible in July 2010 when Daiichi took over Ranbaxy’s New Drug Discovery Research unit as part of the strategy to strengthen its global research and development apparatus. NDDR has been swallowed up by India’s Daiichi Sankyo Life Science Research Centre in Gurgaon.

Moreover, branded markets (with fatter margins than unregulated markets) are slowly being taken over by Daiichi for sales and marketing. “It has already taken over Mexico and Venezuela. Brazil, which is an important market for us, will go to Daiichi by January 2013 and then the whole of Latin America,” says a Ranbaxy senior executive who knows of these plans but doesn’t want to be identified. So Ranbaxy will be left marketing to the poorer countries of Africa and Eastern Europe. All this means further pressure on Ranbaxy’s margins. Sawhney’s comeback: The drugs will be made in Ranbaxy’s factories and it will still get a share of the pie.

But for now, it’ll need to avoid further missteps in the U.S.