A blame game conundrum over Ranbaxy

July 9, 2013

(Any opinions expressed here are those of the author and not of Thomson Reuters)

Ranbaxy Laboratories pleading guilty in a U.S. Department of Justice probe in May has led to fresh concerns about the company and its generic pharmaceutical peers. Japanese drugmaker Daiichi Sankyo Co, which owns Ranbaxy, has talked of possible legal action against the company’s former Indian owners.

In 2008, the U.S. Food and Drug Administration banned imports of products made at two of Ranbaxy’s factories in India over safety issues. That’s where the company’s battle to return to the world’s largest drugs market began.

The UK regulator and the World Health Organization have given a clean chit to Ranbaxy on the quality of its medicines in the market. The Indian Supreme Court last month dismissed a public interest litigation asking for an investigation into the quality of medicines manufactured by Ranbaxy.

Before it was taken over by Daiichi, Ranbaxy was a shining example of an Indian enterprise in the generic medicines market. Along with Cipla, Ranbaxy was a role model on what Indian enterprises could achieve with supportive regulatory policies. An amendment to the Indian Patents Act of 1970 gave rise to the generic drugs industry in India, so much so that India is now known as the world market for generic drugs.

The question that comes up is whether lack of quality is endemic to the entire generic drugs market in India. An ancillary question is specific to Ranbaxy – who is liable for the $500 million penalty levied on the company in the United States.

Regulatory standards in various Western countries are extremely stringent. Approvals and certifications of good manufacturing practices (GMP) are hard to get. There have been several instances of a half-hearted attempt to comply with standards leading not only to a refusal of certification, but also blacklisting of the company.

The Indian drugs market comprises several large and small players. Larger players who export to the Western world need certification for their manufacturing facilities. It is only then that such lucrative markets open up for them.

Brand awareness is on the rise even in rural areas. This is a consequence both of trust in certain brands being developed over a period of time as also a rise in literacy. Further, because of drug price control on basic medicine, villagers find it is worth paying a marginally higher price for branded drugs rather than be at the mercy of slightly cheaper but sub-standard drugs.

Branding is therefore one of the elements that leads to success in the Indian generic drug market. It would be suicidal for any drug manufacturer not to comply with quality standards.

What happened at Ranbaxy is obviously an aberration, one that transpired on account of factors specific to the drugmaker. It is well known there was a change in generational control in Ranbaxy. Also, there were certain unsafe manufacturing practices that the former management probably persisted with, despite being brought to its attention. The reward given to the whistle-blower is also a salutary example that such persons are to be rewarded, not victimized.

But is it the responsibility of Ranbaxy’s earlier management led by Malvinder Singh and his brother Shivinder, or is it something that Daiichi was aware of when they signed the deal. There are conflicting reports on this issue. While Daiichi has said – without naming the Singh brothers – that it was “pursuing its available legal remedies” against certain former shareholders, the Singh brothers have rejected allegations they misled Daiichi over the FDA probe.

The Singh brothers, who now run Fortis Healthcare and Religare Enterprises, have said that the Japanese company was made aware of the U.S. investigations during negotiations for the Ranbaxy deal.

The moot question is whether Daiichi can succeed in its claim against the former management? Would it be able to recover the money Ranbaxy had to pay and would it be able to claim damages? The answer lies in the share purchase agreement and associated documents executed between the parties. The nature of representations and warranties and the disclosure schedule attached to the documents read with the indemnity clauses would ultimately determine the issue. Procedurally, the dispute resolution mechanism would also play a role in determining how quickly and effectively the dispute would be resolved. As of now, there is no news available in the public domain as to what is being done.

The basic issue is for Daiichi to determine whether they are likely to succeed in their claim. There would be an attempt to analyze all options before action is taken. However, the location of the arbitration will decide the speed of resolution of the dispute.

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