Investors in Ranbaxy Laboratories Ltd had all but filed away the company’s regulatory issues as a bad memory, when its consent decree has forced a rethink.
Ranbaxy announced the signing of the decree (without giving details) in December, and also the creation of a separate $500 million provision to meet any civil or criminal liabilities. Ranbaxy said then it had committed to further strengthen procedures and policies to ensure data integrity and comply with good manufacturing practices.
File photo
Investors assumed that Ranbaxy’s regulatory troubles were nearing an end. Its share had risen by 18% since the announcement, till Thursday. But some of the consent decree’s provisions were unforeseen by investors. The company has to give up 180-day marketing exclusivity rights for three generic drugs where it has the first-to-file (FTF) status.
In addition, if it fails to get final approval on another FTF drug by 25 March, 2013, it will lose exclusivity rights on this too. For four other FTF drugs, it has to comply with data submission and audit requirements by certain dates, or it will lose exclusivity.
The six-month exclusivity window is when competition is limited, and the generic challenger maximises revenues and profits. The decree, therefore, cuts into Ranbaxy’s FTF cash flows from three drugs, with five more at risk. The names of the drugs are secret; so the amounts involved are a matter of conjecture.
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But that’s not all. The decree requires Ranbaxy to hire an expert to review the plants that were found to be non-compliant; audit all applications filed based on data from these facilities; withdraw any application which may have false data; set up an office of data reliability in the US (which will do a pre-submission audit of all applications, not just from the affected facilities); and, hire an outside auditor to audit the affected facilities.
All of this means additional costs and time to comply with these requirements, and could possibly delay the approval process. And, regulators, too, have to be satisfied. The fact that Ranbaxy was allowed to sell generic Lipitor in the US is a sign of some faith among the regulators. The decree’s stiff terms may be one way of convincing the people –and US lawmakers- that the regulators are taking this matter seriously.
But it does create uncertainty for investors. It did not help that Ranbaxy did not even hint, in December, about these clauses. Investors now know that revenues from three first-to-file drugs has been lost, and five more are at risk. That has a tangible impact on valuations.
The first positive development to watch for will be success or failure to launch these five FTF drugs. If the review process does not affect other drug applications, that’s another positive. If Ranbaxy is finally able to operate unhindered in the US market, then that’s a real positive.
But that’s in the long run. The share price decline of 6.6% on Friday shows investors are reacting to the negative surprises coming out from the consent decree. They will be right to wonder what’s coming next.
Graphic by Ahmed Raza Khan/Mint
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