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Crash boom ‘bax’: the rise & fall of Ranbaxy

Crash boom ‘bax’: the rise & fall of Ranbaxy
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First Published: Thu, Jun 04 2009. 01 15 AM IST

 Dynamic duo: Malvinder Singh (left) and his younger brother Shivinder Singh, with whom he built Fortis Healthcare. Photographs courtesy India Today
Dynamic duo: Malvinder Singh (left) and his younger brother Shivinder Singh, with whom he built Fortis Healthcare. Photographs courtesy India Today
Updated: Thu, Jun 04 2009. 09 54 AM IST
New Delhi: Last year, after Malvinder Mohan Singh and his family sold their entire stake in Ranbaxy Laboratories Ltd to Daiichi Sankyo Co. Ltd, Singh stayed on as chairman, chief executive and managing director (he eventually exited the company late last month).
Dynamic duo: Malvinder Singh (left) and his younger brother Shivinder Singh, with whom he built Fortis Healthcare. Photographs courtesy India Today
By staying on, he was merely following in the path of Gurbax Singh—the “bax” in Ranbaxy is from the second syllable of his first name—who, 56 years ago, stayed on as president of the board after selling the company to Bhai Mohan Singh, Malvinder Singh’s grandfather, for all of Rs2.5 lakh.
The Singh family made many times that when it sold the firm to Daiichi, Japan’s third largest pharma company, earning Rs10,000 crore for its 34.82% stake.
Gurbax Singh’s sale and eventual exit from the company—the other co-founder, Ranbir Singh, from whom Ranbaxy gets the first part of its name, had left long before—was only one of the many changes the pharma company’s management and strategy would see in a tale of twists and turns. And the Ranbaxy story is as characteristic of what happens in most family-owned and -run businesses in India as it is of the Indian pharma industry’s evolution—from makers of cheap, illegal copycat drugs and suppliers of raw material to respected manufacturers of generics, legal copies of off-patent drugs and, ultimately, to research-driven firms.
Much of the early part of the company’s history, till December 2003, is well chronicled in business journalist Bhupesh Bhandari’s book The Ranbaxy Story. Bhandari, now an editor at Business Standard, would probably have had a better yarn to tell if he had waited.
When it was founded in 1937, the then Ranbaxy and Co.’s first business was reselling drugs made by Japanese firm A Shiniogi. Seven decades later, the Singh family sold out to a Japanese firm.
The second sell-out
In June 2008, the stock market knew the Singhs were looking to sell a significant stake in Ranbaxy. The company’s stock was up and “everyone knew that they were selling and it was just a question of who they would sell to and how much the valuation would be”, according to an equity analyst who has followed Ranbaxy’s progress for around 10 years.
Also See Equity And Company History (Graphics)
So, when the announcement finally came on 11 June, Ranbaxy’s shares remained almost flat, rising as high as Rs592.70 in intraday trade, but closing at Rs561. “Of course, investors thought the sell-out was a good thing, but they also wondered why Malvinder (Singh) was selling and whether he knew something about the company that others did not,” added the same analyst, who asked not to be identified because he is not allowed to speak to the media.
Still, at Rs737 a share that Daiichi was paying, the money was good. And the timing of the sale was just right. It happened around the time Ranbaxy’s turnaround from a nightmarish 2005 was completed. Malvinder Singh, now 36, took charge as Ranbaxy’s chief executive in January 2006. The previous year had seen a decline in the company’s US revenue, which then alone accounted for 28% of total revenue. Under Malvinder Singh, Ranbaxy expanded aggressively in Europe, Russia and other Eastern European countries. In 2008, it also settled a string of patent suits, clearing the way for several launches in the US. The company’s research efforts still needed to be fixed, but that, says a former Ranbaxy executive, may have been beyond Malvinder or anyone else.
Big Three: Bhai Mohan Singh (top) was known to have strong connections in the corridors of power, which helped him build Ranbaxy; his son, Parvinder Singh (above left), took Ranbaxy to greater heights with his knowledge of the sector; and Davinder Singh Brar, the latter’s close associate and a bone of contention between father and son, took on some of the world’s largest pharma firms in his thirst for overseas expansion. Photographs: India Today
“There was a complete R&D (research and development) failure in Ranbaxy when it came to novel drug discovery and the creation of an innovative pipeline (a pipeline of new drug molecules),” added this person, who had joined the company in 2007 in a senior R&D position and left soon after the Daiichi acquisition.
He did not wish to be identified.
Ranbaxy did make the requisite investments in research, but had nothing to show for it. And Malvinder Singh may not have had the patience to play a waiting game, the former executive added. “The problem was that unlike his father, Dr Parvinder Singh, Malvinder (Singh) did not have a medical background. So, when it came to R&D, he would not like to go into details of how or why something was happening the way it was… He only wanted to see results.” This may have played a part in influencing the Singh family to exit the company, said the former executive.
Early years, first sell-out
Gurbax Singh had taken a loan from Bhai Mohan Singh’s finance company Bhai Traders and Financiers Pvt. Ltd, but was unable to repay the money and transferred ownership of his company instead.
Bhai Mohan Singh started off by selling imported drugs. In 1956, India banned the import of finished pharma products and Ranbaxy opened a manufacturing plant in Okhla, said B.K. Keayla, who worked closely with Bhai Mohan Singh and his eldest son Parvinder Singh.
“That office is now with (Bhai Mohan Singh’s) youngest son Analjit Singh (the promoter of the Max group of companies),” added Keayla, 84.
Parvinder Singh joined Ranbaxy in 1967.
“The wisdom of Bhai Mohan Singh and (the) expertise of Parvinder took the company to greater heights. They had a good team of people working with them. It was Parvinder’s vision that Ranbaxy invest in both R&D as well as manufacturing in order to survive,” said Keayla.
In 1973, Ranbaxy went in for a public issue “to bankroll the (R&D) project and raised Rs70 lakh from the market”, writes Bhandari in his book. And in 1977, Davinder Singh Brar joined Ranbaxy.
The duo—Parvinder Singh and Brar—are widely credited with turning around Ranbaxy’s fortunes.
The growth years
“Meeting Dr Parvinder Singh and Mr Brar, one realized that here was a combination of two phenomenal visionaries. They convinced me that exports, and better still, international markets, were the way forward for any Indian pharmaceutical company,” said Sanjiv Kaul, who joined Ranbaxy in 1984 as a sales manager and spent two decades with the company.
Kaul’s entry roughly coincided with two key changes at Ranbaxy: the desire to go international, and the willingness to induct professional managers into what was then a family-managed company.
Still, added Kaul, it was pretty much “like a family”.
“The top management would meet at least once a day, say, for lunch, and Dr Singh would sit at the head of the table with 8-10 senior managers around him. It was a great opportunity to discuss the day’s strategy and plans. It was a fairly close-knit, passionate group of individuals who knew that we were making history,” he said.
In 1983, Ranbaxy aggressively started pursuing opportunities to enter the US and European markets.
“Many of the barriers that we broke in our pursuit of international business were in many ways going to open doors for other companies in other sectors. And the fact is that we did extremely well, we saw phenomenal success. Success that could be measured in terms of market entry, sales growth; success in terms of profits, creating marketing alliances, setting up joint ventures, creating representative offices, appointing distributors and marketing to them and having representatives on the payrolls of distributors,” added Kaul.
The team of senior managers Parvinder Singh managed to attract and nurture were young people, in their 20s and 30s, which was almost unheard of in a company of Ranbaxy’s heritage and size in the 1980s.
“It was phenomenal…the empowerment, the trust. And we were all young; we all had very little to lose and everything to gain. So, we all worked together for the creation of Ranbaxy outside India and that was exhilarating,” said Kaul.
Somewhere along the way, though, Parvinder Singh and his father stopped seeing eye to eye and cracks between the two began to emerge.
Kaul remembers the day he rallied a group of very senior managers and stormed into the board meeting where Parvinder Singh and Bhai Mohan Singh were fighting over keeping Brar in Ranbaxy. “Bhai Mohan Singh was dead against him and Dr Singh was in favour of keeping him on. And I led a team of very senior managers from business and manufacturing and R&D into the board meeting and spoke out that we all were with Dr Singh and if either Dr Singh or Mr Brar were to be removed from the scene then we all would walk out...”
The next morning, Kaul was fired by Bhai Mohan Singh. The same afternoon, he was reinstated by Parvinder Singh.
The differences between father and son had started in 1989 when Parvinder Singh restructured the executive committee. While the earlier 12-member committee had five members of the Singh family, the new one was a small six-member committee in which there was room for only two from the family.
“Also, all the expansion plans drawn up by Dr Singh required fresh infusion of capital into the company. This, again, would have called for a dilution in the promoter’s stake in the company. Bhai Mohan Singh had little contribution to make to the new Ranbaxy,” writes Bhandari in his book. “Bhai Mohan Singh felt alienated.”
On 6 February 1993, Bhai Mohan Singh and four of his associates resigned from the board of Ranbaxy.
With his father out of the way, Parvinder Singh set out to mould Ranbaxy into the kind of company he wished to create. And it was evident even then that Brar would succeed him at the company.
A period of transition
Even as Parvinder Singh reshaped Ranbaxy, he was very clear he wouldn’t sell out ever, said Kaul and Keayla.
“We had discussions during the time of Dr Singh that if there was going to be big money put on the table, would Ranbaxy ever (allow itself to) be acquired by a multinational or a large generic company? And the answer was a resounding ‘No’,” added Kaul.
In 1999, Parvinder Singh, who had been fighting cancer, succumbed to it. Although it was clear that Brar would take over, the transition wasn’t entirely smooth. Malvinder Singh had joined Ranbaxy the previous year after completing a master’s in business administration from Duke University. And Bhai Mohan Singh’s dislike for Brar hadn’t gone away.
Still, Brar did take over and under him the company witnessed some of its best years. Ranbaxy grew rapidly in the late 1990s and the early 2000s. Its revenue grew from Rs1,560 crore in 1999 to Rs3,614 crore in 2004. And the contribution of international operations rose from 47% of revenue to 68% in the same period. The company became a regular in the list of top 10 companies on the Bombay Stock Exchange (BSE) in terms of market capitalization. At its peak, the company had a market value of Rs22,108 crore, on 18 June 2008. (By the time it was sold, this was down to Rs9,190 crore).
In 2004, Brar left the company he had helped build in circumstances that weren’t entirely pleasant. Nor were the events very clear. Brar himself has rarely spoken about this and was unavailable for comment for this story.
Brian Tempest, an amiable Englishman who had joined Ranbaxy in 1995 as regional director (Europe, Commonwealth of Independent States and Africa), took over as CEO, but it was clear that he was just warming the chair for Malvinder Singh, who eventually became CEO of the company in 2006. He was then 33 years old.
The beginning of the end
Although Malvinder Singh was visibly passionate about Ranbaxy, he always made it clear that he had other interests too. Along with his younger brother Shivinder Mohan Singh, he invested a lot of time and energy (and family money) into building Fortis Healthcare Ltd—the healthcare business the company had acquired in 1995. His interest in financial services also kept him busy with Religare Enterprises Ltd, the financial services company he founded in 2006.
Meanwhile, Daiichi Sankyo, scouting for acquisitions, had started talking with Ranbaxy, and appointed New Delhi-based P&A Law Offices to act as its agent in the matter. The Japanese firm agreed to buy the Singh family’s stake in Ranbaxy and things looked good, at least for the family. But then, the US Food and Drug Administration (FDA), that country’s drug regulator, struck.
“Malvinder had inherited the FDA issues. The Dewas and Paonta Sahib facilities of Ranbaxy had initially got warning letters in June 2006 from FDA,” said the analyst mentioned in the first instance.
In 2006, Ranbaxy may have made the mistake of cooperating with FDA only to the extent that the rule book said it should, added this analyst. “They (Ranbaxy) told us off the record that they should have been less arrogant with the FDA.”
FDA eventually withdrew the warning.
“Negotiations with Daiichi commenced in December 2007. Daiichi wanted to diversify into generics and Ranbaxy was a leader, with access to several markets. The only initial challenges were the price and the terms and conditions,” said a person who was closely involved in the deal between Daiichi and Ranbaxy.
“But the FDA issues came up in their starkest form after the deal was signed,” added this person, who asked not to be identified because of his close involvement with the two companies.
Shareholders of Ranbaxy cheered the deal, but the story was different in Japan.
“When I heard the structure of the deal, I thought it was a very interesting business model. Unfortunately, the stock price of Ranbaxy collapsed even before the deal closed because the Indian market was very weak as well as because of the FDA issue,” said Hidemaru Yamaguchi, an analyst with Nikko Citigroup Ltd in Japan.
Soon after Daiichi agreed to acquire Ranbaxy in June, FDA issued warning letters to the Dewas and Paonta Sahib plants of Ranbaxy and also issued an import alert on 30 products of the company.
“Since so many unexpected things happened before closing the deal (in November), Daiichi could have renegotiated the deal, which is a normal thing for any company to do. But they didn’t do anything. This was good for the Singh family, but bad for the Daiichi investor,” added Yamaguchi.
When the Ranbaxy acquisition was announced in June 2008, Daiichi’s stock was trading around 2,800 yen (Rs1,372 today). “Today, it is around 1,700 yen and it has dropped primarily due to Ranbaxy, a drop of 50%,” he said.
Daiichi Sankyo didn’t just stick to its end of the bargain, but also retained Malvinder Singh as chairman of the board and CEO.
“I always thought this arrangement would last for a year, two years maybe—till such a time that the Japanese would learn their way around and understand the management much better through processes and systems, and ultimately through their own people,” said Kaul.
In February 2009, FDA invoked its application integration policy (AIP) on Ranbaxy’s Paonta Sahib plant—a move that halted the review of all applications from the plant. Ranbaxy shares fell 18% and Daiichi’s lost 9.5%.
The final goodbye
On 24 May, 11 months after he sold Ranbaxy to the Japanese innovator, Malvinder Singh stepped down from all his positions at the company.
“It was a mutual parting of ways. He has other businesses where he wanted to focus and Daiichi told him that they understood if he wanted to do that. It was extremely gracious from both sides,” said the person closely involved in the deal, and mentioned in the first instance.
But the move may have also been hastened by growing concerns in Japan.
“The attitude of Daiichi completely changed after the AIP issue because then it became an accountability issue. Daiichi stepped in, there were changes in the board and this was viewed by the investors as a positive trend. No one expects the FDA issues to resolve quickly, but at least there is some clarity for Daiichi investors now,” said Yamaguchi.
And Malvinder Singh may not have been unhappy to leave, said a person who works closely with the Singh family and asked not to be identified. According to this person, while none of Ranbaxy’s senior management or even non-family board members were keen on the promoters exiting the company, the Singh family, and a few of its confidants, went ahead and did so because the family wanted cash to invest in businesses such as financial services and healthcare that it considered better bets than pharma.
“Frankly, what was he (Malvinder Singh) doing there? With so much money and the Religare and Fortis businesses looking so bright, he had nothing to gain,” said Kaul
Still, there were some people who found the exit as strange as it was sudden.
One analyst with a foreign brokerage firm points to the fact that Malvinder Singh was given a five-year contract and an annual salary of Rs25 crore (up from Rs20 crore) last June after the Japanese company took over. He has had to terminate the contract and the Japanese company has paid him a severance of Rs45 crore, added this analyst, who did not want to be identified. This seems to suggest that there is “more to it” than meets the eye, said the analyst.
On 15 May, BSE, in a routine review, announced that starting 29 June, Ranbaxy would be replaced by Hero Honda Motors Ltd in its benchmark Sensex index. Nine days later, Atul Sobti, the former head of marketing at Hero Honda who had joined Ranbaxy in 2007, replaced Malvinder Singh as the CEO and managing director of Ranbaxy.
C.H. Unnikrishnan in Mumbai contributed to this story.
Graphics by Sandeep Bhatnagar / Mint
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First Published: Thu, Jun 04 2009. 01 15 AM IST