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Ranbaxy settles with US regulators - Views on News from Equitymaster
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Ranbaxy settles with US regulators
May 15, 2013

Ranbaxy Laboratories Ltd has announced that the company has concluded the investigation by the US department of Justice (DOJ) for data integrity and manufacturing processes at its two facilities viz., Dewas and Poanta Sahib located in India. Under the terms of final settlement, the company has agreed to settle both civil and criminal violations. This will bring an end to all the filed allegations in various courts. Further, the company has agreed to plead guilty for violating the laws of the Food, Drug and Cosmetic Act of United States. Ranbaxy has agreed to make the payments worth US$ 500 m, for which the company had already created a provision in 2011.

Flashback

In Sept 2008, the USFDA had issued two warning letters to Ranbaxy's above mentioned two facilities. FDA had also issued import alert for generic drugs manufactured in these facilities. Import alerts are not as rampant as warning letters are. They are generally issued when a company has intensively violated USFDA norms. As per the import alert website - "FDA Import Alerts are issued whenever FDA determines that it already has sufficient evidence to conclude that a company's products appear to be adulterated, misbranded, or unapproved, and that therefore they may be refused admission". As a result of an Import Alert, FDA will automatically detain a company's products at the border.

These actions by USFDA had not only restrained Ranbaxy from getting new approvals but had also adversely impacted the manufacturing of the approved products. Because of this, the company has already faced immense pressures in the US. The consequences of these events were:

  • The US business started witnessing negative growth barring exclusivities.
  • Ranbaxy had to either sell off or share its billion dollar Para IV opportunities. Some of these drugs were such where the company was sole FTF (First to file). Flomax, Lipitor, Caduet are the perfect examples in this case.
  • As the company was having only one facility in the US - Ohm Laboratories, the margins were not as good as from Indian facilities.
  • The company's fillings had come down.
However in Dec 2011, in order to bring an end to these issues, Ranbaxy entered into consent decree with the US Food and Drug Administration (USFDA) under which the company had committed to strengthen its CGMP (Current good manufacturing practices). The company had already made provision of US$ 500 m for eventual penalties that the Department of Justice (DOJ) may levy. After signing the consent decree, Ranbaxy has been cooperating with the USFDA to work out a proper remediation plan. In that sense, the recent settlement is positive for the company and raises hopes that it will soon be able to end its problems with the USFDA.

Our view

There has been a lot of churn in the upper ranks of management at Ranbaxy over the past few years. In June 2008 when Ranbaxy's promoters had sold their stake to Japan based company Daichii Sankyo, the group promoters of the company continued to take the charge of Ranbaxy operations. But unexpectedly within a span of a year, in May 2009, Daichii Sankyo decided to take charge from the Singh family. Thus Malvinder Singh stepped down from his post of CEO, chairman and MD. Even two directors in the 10-member board had resigned. In the meantime, Ranbaxy received these warning letters from the US FDA. Post these developments, while Mr Atul Sobti headed the company for a brief period of time, he too stepped down subsequently to make way for the current management. Secondly though the company had received the warning letter in 2008, there have been increasing talks of late that the problems at the facility were raised by a senior person long back, during 2004, however nothing much was done about it.

Though the current event takes Ranbaxy a step ahead in resolving the issues, as such there is no financial upside at this point of time. The company had already made a provision of US$ 500 m in 2011 and had been incurring additional charges since the last couple of quarters towards the plant investigation procedure. These seem to have hurt EBITDA margins by 200-250 bps (basis points). After this settlement, these expenses can come down going forward although there is no clarity on this front. Further, it is also not very clear by when both the facilities will get re-approved by the USFDA.

It appears that the new management is taking all the steps to bring about a revival in the company's operations. We, thus recommend investors to Hold on to the stock, until more clarity appears on many of the other aspects. However do not buy more stock at current levels

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