How can Daiichi fix the Ranbaxy mess?

What should the Daiichi management do to salvage the erosion in brand value that its expensive acquisition Ranbaxy has suffered due to regulatory challenges?
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First Published: Tue, Jun 04 2013. 06 51 PM IST
A file photo of a Ranbaxy Lab in Gurgaon. Photo: HT
A file photo of a Ranbaxy Lab in Gurgaon. Photo: HT
Put in place a new organizational culture
Raveendra Chittor, assistant professor of strategy, ISB, Hyderabad
In 2008, when Daiichi Sankyo Co. Ltd acquired Ranbaxy Laboratories Ltd, it seemed like just what the doctor ordered—a copybook acquisition. Daiichi had a global presence and strengths in innovative products, but was running out of new products and growth. Ranbaxy was an emerging multinational with established strengths in developing and selling generics, a segment that was growing rapidly in the developed world. It seemed like a perfect marriage with each entity bringing distinctive strengths to the table. There was, of course, criticism on the price being steep, but which big-ticket acquisition comes cheap? But there was no fairy-tale ending to the story as Ranbaxy struggled with a series of investigations by the US food and drug administration into its facilities over the last few years. These investigations recently culminated with Ranbaxy pleading guilty to some of the charges and agreeing to pay $500 million (around Rs2,830 crore today) in a settlement, the highest ever penalty levied against a generic drug maker. Daiichi has now alleged that the former shareholders had concealed critical information at the time of the deal, which is being fiercely denied by the prior owners. Without knowing the facts, it is futile to go into the question of who is right.
The more pertinent question to ask is: what steps should Daiichi take now with regard to Ranbaxy? The Indian drug maker’s value potential is still tremendous; it closed 2012 with a total revenue of nearly $2.5 billion, split roughly equally between developed markets and emerging markets. Daiichi’s immediate steps should be aimed at preserving this market and proactively averting any adverse reaction from its existing customers to recent events. It should do so by taking visible steps to pledge its commitment to the highest standards of quality in its operations and compliance. If it is warranted, it may need to take the hard decision of letting go some people.
Significant and sustainable changes in quality practices are often not possible without a change in culture, and so Daiichi should initiate steps to put in place an altogether different organizational culture going forward. With its Japanese background known for legendary quality, this should not be difficult to achieve. If Daiichi takes proactive steps such as these to protect the core strengths of Ranbaxy, the Daiichi-Ranbaxy combination could well be on track to achieve the goals it set for itself.
As told to Sunil B.S.
Address regulatory challenges on a war footing
Shriram Subramanian, founder, InGovern Research Services
The company should address the regulatory challenges on a war footing. We haven’t seen the company reach out to investors, patients and doctors, and assure them that the company is working to address regulatory issues and that the drugs sold by it are safe,” says Shriram Subramanian, founder and managing director of InGovern Research Services Pvt. Ltd. Rather than issuing a few bland press releases, the board of directors and the chief executive officer of the company should have made a public appeal to restore faith in the company’s products, says Subramanian.
InGovern Research Services is India’s first proxy advisory and corporate governance research firm.
“Just saying that we have improved business and quality assurance standards doesn’t address the root of the problem: perception,” he points out. If doctors and hospitals stop recommending Ranbaxy products, it will have serious business impact, Subramanian cautions. If one regulator fines the company, others will follow suit, he says.
“For the longer term, the board of directors of Daiichi should look at Ranbaxy from a holistic perspective to figure out deficiencies within the organization and resurrect the company’s brand,” he says. A European regulator recently said it will fine nine makers of generic drugs, including Ranbaxy, for limiting the supply of cheaper medicines. “I presume Daiichi had a strategy and logic for buying Ranbaxy, and that hasn’t yet played out. The board of directors should adopt an enterprise risk management framework, looking at all aspects of risk—people, process, policies and products,” he says. Subramanian suggested that the board of directors should adopt and establish higher standards of governance than what is the norm. “Governance, risk and compliance should be high on the radar. All employees should be sensitized and trained to these higher standards. Any deviations should be taken very seriously,” he says.
The company should also work harder to win back the trust of all stakeholders—regulators, patients, doctors, hospitals, suppliers, distributors—and change the perception that it is a company that truly cares for good quality drugs and patient care, he suggests.
“The company should even consider whether it makes sense to change the brand name from Ranbaxy to another name,” Subramanian adds.
As told to P.R. Sanjai
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First Published: Tue, Jun 04 2013. 06 51 PM IST