Wrong medicine

There is nothing to it,” said Malvinder Mohan Singh, MD and CEO of Ranbaxy Laboratories, on the day Indian newspapers first reported legal trouble in the US. Several days later, though, he amended his stance. “Clearly Ranbaxy’s reputation has been damaged— we will work hard to correct this damage,” he promises.

In the intervening week there was talk of a US Congressional probe in addition to the ongoing Food and Drug Administration (FDA) and Department of Justice investigations. The pressure intensified as Ranbaxy’s share price lost almost a fourth of its value in just two trading days on speculation that the strategic sale to Japanese drug maker Daiichi Sankyo could be undone.

Ranbaxy duly swung into damage-control mode, with Singh pointing a finger at a multinational pharma rival for trying to scupper the $4.6-billion Daiichi deal. While that may be true (after all, generic challenges to blockbuster pharma drugs typically involve billions of dollars: For example, in the high profile Lipitor case, despite settlement with Ranbaxy, the dent to Pfizer would easily be $5 billion); it is equally true that the company’s handling of the crisis was less than adept.

Legal fine print and eventual outcome apart, the grave allegations alone inflicted heavy damage. In a filing in the Maryland court, though the US government merely sought additional information, it said that there was “a pattern of systematic fraudulent conduct”. It included in this conduct, “submissions by Ranbaxy to the FDA that contain false and fabricated information about stability and bio-equivalence” of the company’s generic medications. Further, it feared that the violations continued to lead to “the introduction of adulterated and misbranded products” in the US.

Several days later also, Singh says, “We are not sure why the motion was filed,” even as he claims the same information had been provided to the FDA in April and it was to be shared with the Department of Justice, too.

What has added to Ranbaxy’s woes is that the oversight committee of the US Congress has used this case as an opportunity to rap the FDA for negligence. The big question it is interested in: Did FDA officials know about the potentially fraudulent information but approved Ranbaxy’s products anyway? The timing of this controversy is particularly inopportune as it comes within months of deaths in the US due to contaminated blood thinner, Heparin. Clearly, the company is in a spot.

As Akshoy Rekhi, Partner at corporate law firm, Abacus Legal Group, points out: “In an issue involving risk to human lives, courts take a close look. If class action—simply a situation in which many people are affected—is triggered, then the damages can be unlimited.’’

Indian pharma industry representatives complain that the company’s inept handling of the issue precipitated a crisis that could tar the entire Indian pharma industry. “Even if Ranbaxy is exonerated, the damage is already done,” a senior pharma industry official says.

Ranbaxy’s woes, however, go deep. The company derives nearly a quarter of its revenues from the US. The FDA probe dates back to February 2006. The Paonta Sahib facility, which is in the eye of the storm, has been unable to ship products to the US since then. “This has already impacted Ranbaxy significantly; for example, it could not launch generic Pravastatin in time, despite having 180-day exclusivity on the 200 mg strength,” a recent Enam Securities report points out.

More trouble would mean more losses. Ranbaxy has time till August 14 to file its reply. Additionally, the strategic sale is hanging fire with the capital market waiting for clarity. “As long as the deal goes through, the market will not care,” says a Mumbai-based fund manager.

Both companies have voiced their commitment. Singh, however, adds that with the board and shareholder approvals “the decks have been cleared for the deal to proceed as planned”. Daiichi gets to make its open offer for 20 per cent of the company’s stock from August 8 onwards, decisively casting its lot with the company.

Are there chances that it may back out? “Typically such deals have a standard clause that relates to a material, adverse change in the business,” says Gowree Gokhale, Co-head, Pharma and Life Sciences practice at law firm Nishith Desai Associates. Such adverse impact (say, an extreme case of crucial approvals getting cancelled) can be ascertained only once the investigation ends, and that could take six months or more. It surely promises to be a long year for Singh. Meanwhile, as they say in legal parlance, the case is sub-judice.

Additional reporting by E. Kumar Sharma