Ranbaxy Faces FDA Wrath, Doctors Seek Regulator’s remarks. Investors Panic. What Next?

US health regulator Food and Drug Administration has found as many as eight lapses in Ranbaxy’s Toansa plant in Punjab which was recently banned by the US drug inspectors from making products for the American market.

“Our inspection of QC Analytical and Microbiological laboratories found the facility to be in significant disrepair. Laboratories windows within the instrumentation (eg: HPCL) rooms were found to be un-closeable,” a report released by the FDA inspection teams said.

“Too Numerous To Count (TNTC) flies were observed throughout the sample preparation room, and laboratory re-agent/equipment/documentation storage cabinets were found to be broken and un-closeable,” the report said.

Other lapses included usage of un-calibrated and unqualified instruments in laboratory, said the report, which was released two days ago.

This is the company’s fourth plant to face regulatory action from the American health regulator after Mohali, Paonta Sahib amd Dewas plants.

Citing manufacturing norm violations, the FDA prohibited Ranbaxy Laboratories from distributing drugs produced at the Toansa unit, including medicines made by the company’s Ohm Laboratories facility in New Jersey.

Expressing disappointment over the FDA ban, Ranbaxy had said it will cooperate with the FDA and “comply with Consent Decree in both letter and spirit”.

The FDA inspection report further said that the Indian drugmaker repeated the same errors which were cited by the regulator in its earlier inspection in December 2012.

“Appropriate controls are not established over computerised systems… this is a repeat observation from the previous FDA inspection in 12/2012.

“Specifically the standalone computerised system controlling GC# 6 does not have sufficient controls to prevent unauthorised access to, changes to, or omission of data files and folders,” the report said.

The audit team said that the raw material, intermediates and finished API (active pharma ingredients) analytical results found to be failing specifications or otherwise retested until acceptable results are obtained.

These results are not reported.

Ranbaxy Laboratories will have to undertake a series of initiatives including a third party audit of its facilities in India if it wants the US Food and Drug Administration (FDA) to revoke the ban imposed in 2008.

The Indian drug maker will also have to put in place controls to ensure data integrity in the company’s drug applications.

The company has to appoint an individual who will be responsible for all quality assurance and quality control activities to ensure that drugs have the required safety. In addition, Ranbaxy has to establish an Office of Data Reliability to conduct pre-submission audits of all applications submitted from any of its facilities.

This is part of a consent decree signed between the FDA and Ranbaxy on December 20. The contents of the decree have now been made available after the document was filed in the US District Court of Maryland, on Wednesday, by the Department of Justice seeking a permanent injunction against Ranbaxy.

POSSIBLE DAMAGES

Under the agreement, if Ranbaxy fails to meet conditions imposed by the FDA then it will have to relinquish the 180-day exclusivity that it might have for several generic drug applications.

If the court approves the decree, then Ranbaxy may face liquidated damages for potential violations.

In addition to a provision requiring Ranbaxy to pay $15,000 in liquidated damages for each day of violation, an additional sum of $15,000 for each overall violation has been provided for. Ranbaxy has set aside $500 million for potential penalties imposed by the FDA.

The FDA had banned about 30 drugs manufactured at Ranbaxy’s plants in Paonta Sahib, Batamandi and Dewas on grounds that the company did not follow good manufacturing practice (CGMP) and data integrity.

This also included Ranbaxy’s wholly owned subsidiary Ohm Laboratories facility located in Gloversville, N.Y. The agreement further requires that Ranbaxy comply with detailed data integrity provisions before FDA resumes reviewing drug applications from these plants.

In addition, the decree prevents Ranbaxy from supplying drugs for the President’s Emergency Plan for AIDS Relief Program until drugs can be manufactured in the four facilities in compliance with US manufacturing quality standards.

“Because this company continued to violate current good manufacturing practice regulations and falsify information on drug applications, the FDA took these actions in an effort to protect consumers,” said Ms Dara Corrigan, FDA associate commissioner for regulatory affairs.

Once Ranbaxy has achieved compliance with the data integrity requirements, a third party expert will conduct audits of the facilities to confirm that compliance is being maintained. The decree also permits FDA to order additional Ranbaxy facilities to be covered by the decree if the agency discovers that the facility is not operating in compliance with the law or has serious data integrity issues.

Reacting to the development, Mr Arun Sawhney, Ranbaxy CEO & Managing Director, said this brings greater predictability to the company’s US operations.

“We are pleased with the progress we have made in upgrading and enhancing the quality of our business and manufacturing processes,” he said.

The FDA notice said Ranbaxy is required to hire a third- party expert to thoroughly inspect the Toansa facility and certify to the FDA that the facility and its methods and controls are adequate to ensure continuous compliance with cGMP (Current Good Manufacturing Practices).

“Ranbaxy will not be permitted to resume manufacturing and distributing API for FDA-regulated drugs from the Toansa facility until the agency is satisfied that Ranbaxy has addressed its manufacturing quality issues at that facility,” it further said.

Indian Medical Association, which has nearly 78,000 doctors as members from across the country, would be seeking clarity from the Indian drug regulator on the quality of Ranbaxy Labs drugs, its general secretary Narendra Saini told media.

“We would write to the government on Monday to first seek a categorical response on the quality and safety of Ranbaxy’s drugs. Our primary concern is to ensuring that the drugs are safe and efficacious,” said Saini.

The medical fraternity would ..also await clarity from the drug regulator on the exact nature of problems which is leading to repeated reprimand for the company from the US drug regulator. For doctors, the fundamental parameters of quality would mean tests of bio-equivalence, the amount of active pharma ingredient (API) in the drug, granularity and manufacturing and expiry dates, he added.

This comes in the backdrop of successive regulatory action by the US drug regulator on various plants of Ranbaxy Labs, the latest being on its API plant at Toansa. The FDA has barred drugs from its Punjab based plant citing ‘data integrity’ violations last week. This is the fourth plant of the company from which the US has blocked imports. The other three are formulation plants at Mohali, Dewas and Paonta Sahib.

“We understand that different companies have different parameters to judge quality of drugs, because of which despite US Food and Drug Administration’s (US FDA) complaints, drug regulators of other countries such as the UK or Australia have not emulated similar regulatory action against Ranbaxy” Saini said.

FDA has, however, not asked any Ranbaxy medicines to be pulled out from the US market immediately. “The FDA recommends that patients not disrupt their drug therapy because this could jeopardise their health. Patients who  are concerned about their medications should talk with their health care professional before discontinuing treatment,” the US drug regulator said on Friday.

Ranbaxy said on Friday that it is holding ‘internal investigation’ in the matter and will take ‘appropriate management action’.

“We would urge the drug regulator to do surprise inspections at pharma facilities and checks for quality of the drug by picking random samples from the market. We would also urge our regulator to a ..

Investors Look

Ranbaxy Laboratories plunged as much as 19.6 per cent in trade on Friday, after the US Food and Drug Administration banned the company from shipping drugs and raw ingredients from its Toansa plant in Punjab.

Excluding today’s fall, shares of Ranbaxy have been under pressure and have recorded a fall of nearly 10 per cent in 2014 so far as compared to Dr Reddy’s Laboratories which rose a little over 5 per cent or Aurobindo Pharma which gained nearly 9 per cent in the same period.

Ranbaxy’s Toansa plant, which reported 483 observations earlier, has now been put under USFDA import alert, prohibiting any supplies to US for products manufactured at this plant.

According to analysts, the import alert on Toansa plant is in addition to the alerts already in place on its Dewas, Paonta Sahib, and Mohali facilities. Toansa is the key active pharmaceutical ingredients (API) facility and an alert is likely to put further pressure on business at least in the short term, say analysts.

With this import alert, the operations of the company in US business which contributes nearly 40 per cent are seen getting impacted.

While the management has not indicated this, the plant is said to manufacture around 70-75% of its API requirements, Angel Broking said in a note.

The stock ended 19.33 per cent lower at Rs 336.50. It hit a low of Rs 334.10 and a high of Rs 375.45 in the trade today.

“Ranbaxy has a lot of problems on its hands now and it is only one US facility which they have to cater to the requirements and I don’t think there is enough manufacturing capacity for them to take advantage of Diovan,” said Manish Sonthalia, Motilal Oswal Asset Management – PMS, in an interview with ET Now.

“Import alert on Toansa plant adds one more problem to the already list of problems which they have. So it is a lost case for the time being considering amount of time will go in rectifying the US FDA issues so it is unavoidable I would think,” he added.

For someone who is holding Ranbaxy, Sonthalia is of the view that it a complete exit whenever one gets the chance.

Effectively, all facilities for Ranbaxy, except the Ohm Labs (US) facility is now prohibited from distributing products in the US.

Even for Ohm Labs, Ranbaxy can supply products only with external API sources, Religare Capital Market said in a note.

“We expect US quarterly sales of $125 million (base) to be bit by 35-40 per cent for next 3-4 quarters until they get site transfers for key products. However, this would imply negative operating leverage for its operations which would be underutilized,” said Arvind Bothra, Vice President – Institutional Research, Religare Capital Markets.

US and India are the only two businesses that have been contributing to profitability and with this adverse regulatory action, Ranbaxy’s profitability for next 4-6 quarters would be under duress.
“We expect significant negative impact on stock price following this news and reiterate our stance that Ranbaxy’s quality concerns would weigh on its fundamentals and current valuations are unjustified,” Bothra added.

According to analysts, the import alert on Toansa plant is very critical as they were sourcing one-fourth of their US generic sales from that particular facility.

“I say one-fourth of the filings were backward integrated from Toansa which means that if this facility is not there, they will have to rely on a third party sourcing which means that there would be a further margin corporation which is expected to happen,” said Vivek Kumar, Research Analyst, SBICap Securities, in an interview with ET Now.

Global investment bank Jefferies sees a major impact on Ranbaxy’s business in short-mid term in the light of import alert issued on Toansa plant. Our buy thesis is based on edoxaban potential; however, until we get more clarity, shares are likely to remain under pressure,” Jefferies said in a note.

Where is the stock headed?

While most analysts await more clarity from the management on the exact impact on the financials, especially the OPMs, the company could trade at a huge discount to its peers.

“In terms of the stock, it is expected to trade at a huge discount to its peers. Also, since the company’s OPM is suboptimal, the stock will get valued at EV/sales, where, which we believe, should be in the range of 1.4-1.5x, at almost 50% discount to its peers,” said Sarabjit Kour Nangra (VP-Research , Pharma).

“Thus, on a best case scenario, where we assume the company’s US business is disturbed only during FY2014, and on account of its US sales only being impacted by 5% to 15% in FY2015, then in a best case scenario also the stock will have a downside of around 10-15 per cent from these levels. We recommend a sell on the stock,” added Nangra.

Kumar of SBICap Securities is of the view that there is additional cost that Ranbaxy have to bear to get things back in order so this does raises long-term concerns over the stock and we do expect that the stock correction is justified.

“Whatever is target price that will there on the street should get further depressed almost less than about 20-25 per cent from there on although the financial implications are to the extent of 15% to 20%,” he added.