Ranbaxy to set up drug making unit

Daiichi Sankyo’s first project after the takeover to be set up at Baddi in 6 months.

Indicating that the ownership change has not altered the growth plans of Ranbaxy, the country’s largest drug maker has secured an approval from the Himachal Pradesh government to build a new drug manufacturing facility in Baddi.

The new facility, meant to augment Ranbaxy’s production capacity to serve domestic business, is to come up before March 2010. This is the first new manufacturing project since Japan’s Daiichi Sankyo became its major shareholder last year. Company sources declined to provide details of the project but said it is “well on track to qualify for tax benefits”. The estimated cost of the project is known to be around Rs 40 crore.

While the Baddi project is to augment domestic supplies, Ranbaxy’s Mohali pharma SEZ project, also in the process of execution, is meant for exports. “Our SEZ Greenfield project at Mohali is progressing as per schedule and will augment our already significant manufacturing capability when complete. The product and volume plan would be to try and maximize financial benefit”, a company official said.

Ranbaxy’s domestic drug manufacturing facilities are located at Dewas (Madhya Pradesh), Paonta Sahib (Himachal Pradesh), New Delhi, Jejuri (Maharashtra), Goa, and Mohali and Toansa (Punjab). The Paonta Sahib and Dewas facilities are under the regulatory scrutiny of the United States Food and Drugs Administration and products from these facilities are not allowed to be marketed in the United States. The company is in the process of complying with US regulations and hopes to resolve the problem soon.

India’s growing medicine market is being seen as a major future growth driver by foreign multinational firms. It was one of the triggers for the Ranbaxy acquisition.

The quarterly results of Daiichi, announced in Tokyo today, indicate that Ranbaxy revenues, from both domestic as well as international business, contributed 29.6 billion Yen (Rs 1,487.65 crore). Daiichi has stated that its quarterly revenues from regions including India (excluding major markets like the US, Europe, Japan) saw a 318.7 per cent jump on a year on year basis.

Hitch for pharmaceuticals ‘odd couple’

When executives of Ranbaxy Laboratories and Daiichi Sankyo met in Tokyo at the beginning of the year, it was – in the words of one Indian executive – a moment in the pharmaceuticals industry when McDonald’s met a Michelin-starred restaurant.

About a year after Daiichi Sankyo, the Japanese drugmaker, agreed to buy a 64 per cent stake in the Indian generics producer, Malvinder Singh, Ranbaxy’s chairman and chief executive, has unexpectedly left the kitchen.

The departure of Mr Singh at the weekend marks a big shake-up for Ranbaxy, a multinational business crafted by three generations of his family. It also represents a large gamble for the company’s new Japanese owners. The Japanese-Indian corporate relationship is barely tested outside of the carmaking industry in India. And now the Japanese owners are proceeding without the founding family on board in a challenging operating environment.

On top of this, these are testing times for India’s exports. Indian pharmaceutical exports to the US, one of its biggest markets, have fallen about 40 per cent in recent months. The fall is partly due to a costly import ban on some of Ranbaxy’s products by US regulators.

“When Ranbaxy was an independent entity controlled by the Singh family, decisions were taken in one way. It is now a subsidiary of another company and decisions are taken differently,” Atul Sobti, Ranbaxy’s new chief executive, said of the change in management culture over the past months.

For the time being, investors have viewed the weekend’s events optimistically. On the expectation that Mr Singh’s departure might lead to a Japanese buy-out, the share price shot up 21 per cent to Rs277. There was also relief that greater Japanese control might resolve what has been considered an “odd couple” alignment of two very different companies.

Mr Singh’s family built up Ranbaxy’s formidable reputation for breaking into emerging markets and aggressively challenging patent regimes with generic drugs. Ranbaxy’s new Japanese owner, by contrast, is a master of innovation serving only a handful of developed markets with high-quality products.

The odd-couple image was made all the more stark by the price Daiichi paid for control of Ranbaxy. Daiichi’s purchase looked very expensive almost from the moment it was agreed in June. The price of Rs737 a share reflected neither the difficulties Ranbaxy encountered with US regulators over standards at two of its Indian plants nor the global financial crisis.

Ranbaxy’s share price until Monday had coasted at about Rs220 a share. “[The change at the top] looks like it’s good news for both sides. It was always going to be difficult to see how Mr Singh could continue to work with Daiichi given the problems in America and the price [Daiichi] paid,” said Pelham Smithers, an analyst of Japanese equities at Pali International.

Executives at the Indian and Japanese companies claim their tie-up is a trendsetter the pharmaceutical industry will have to follow. They champion a model that marries a generics business spread across 125 countries with more focused Japanese ingenuity and clinical process.

For Daiichi, the attraction lies in Ranbaxy’s dynamic reach into new markets and its global marketing prowess, particularly in the English language. Ranbaxy, meanwhile, sees opportunity for its generic drugs in the Japanese market, the world’s second-largest and most stringent in terms of quality.

Daiichi needs to make the model work for impatient shareholders. At the beginning of the year, it was forced to reveal a staggering Y359.4bn ($3.7bn) loss on its Indian acquisition inflicted by Ranbaxy’s collapsed share price.

Ranbaxy’s management had not expected too many changes at their head office near New Delhi. While Mr Singh remained chairman, executives viewed an overhaul from Tokyo unlikely.

Some, however, will find little surprise in Mr Singh’s departure. The temptation to take the fortune he made out of selling the company and repeat his success elsewhere was overwhelming.

No sooner had he quit than he was talking up opportunities elsewhere in his business empire, such as a hospital group advertising low-cost treatment to international patients.

Daiichi Sankyo Posts First Loss

TOKYO -- Daiichi Sankyo Co. Tuesday reported a hefty loss for the financial year ended March due to the write-down of its investment in India's Ranbaxy Laboratories Ltd., and projected only a modest recovery this year under the weight of costs in bringing new products to the market.

Its net loss came to 335.80 billion yen, deeper than a 316 billion yen ($3.24 billion) loss the company forecast in late January and a consensus loss of 324 billion yen compiled by Thomson Reuters based on 14 analysts' forecasts.

The loss, however, was in line with market expectations following a local media report about the company's financial outlook earlier this month.

The first ever loss at Japan's third largest pharmaceutical maker by revenue and market capitalization, created from a merger of Sankyo and Daiichi Pharmaceutical in 2005, comes from heavy falls in the share price of Ranbaxy which it acquired last year.

Daiichi Sankyo agreed to buy a majority stake in Ranbaxy before the Food and Drug Administration of the U.S. in September banned the Indian generic drug maker from importing more than 30 generic drugs into the U.S. because of manufacturing violations at two plants in India.

Daiichi Sankyo, known for its blood pressure-lowering drug Benicar/Olmetec and antibacterial agent Cravit/Levaquin, said its sales in the just ended financial year slipped 4.3% to 842.15 billion yen mainly due to the strong yen.

While Daiichi Sankyo is considered by analysts to have the most promising list of new drugs in the development pipeline among Japanese pharmaceutical makers, such products won't come to market and boost the company's profits so soon.

Daiichi Sankyo forecasts a 14% rise in sales to 960 billion yen this financial year to March 2010, with 40 billion yen in net profit - or 59 billion yen before consolidation of Ranbaxy. However, this is far short of 97.66 billion yen net profit booked in the year ended March 2008, just before the Indian company acquisition.

Despite solid sales of its main drugs, the Japanese company expects the stronger yen and costs for clinical studies and sales promotion for new treatments - including heart drug Effient/Efient and blood clot preventing edoxaban - to hinder its profit recovery this year.

The modest profit guidance triggered heavy selling in Daiichi Sankyo's shares on the Tokyo Stock Exchange, losing 9.3% to 1,653 yen in heavy trading.

On Monday, Takeda Pharmaceutical Co., Japan's largest drug maker by revenue, also reported a net loss for the year ended March and provided unimpressive guidance for this financial year due to acquisition costs, the strong yen and limited contributions from new drugs.

Indian Pharma Primed For Growth

Firms hope to capture a share of the $100 billion worldwide market for generic drugs.

Pharmaceutical firms are defying a broad-based slowdown in Indian exports. Growing demand for cheap, generic drugs is proving a particular boon, reflected in a 46% year-on-year rise in exports to the U.S. during December, the last month for which finalized data are available.

Despite rapid growth, Indian pharmaceutical firms have attracted less recognition for their success than their counterparts in the information technology (IT) industry:

--In part, this is because the world of pharmaceuticals is less transparent than that of the Fortune 500 companies targeted by the IT outsourcing industry.

--Reputations have also been tainted by a series of brushes with developed market regulators, notably the November 2008 ban on U.S. imports from two of the largest facilities run by market-leading firm Ranbaxy.

Yet the country's pharmaceutical industry (Indian Pharma) has occupied a number of niches in foreign markets, even as the home market grows rapidly. Most expect their domestic market to grow at around 20% this year and to maintain their operating margins, which are often close to 50%. The most successful companies are becoming serious competitors and collaborators with the largest international pharmaceutical firms.

Generics push. Apart from Ranbaxy (acquired by Dai-Ichi Sankyo of Japan in 2007) and another market leader, Matrix Pharmaceuticals, Indian Pharma has shown considerable independence and entrepreneurialism. It is marked by the desire of Indian firms to acquire companies operating in profitable niches around the world rather than to be acquired themselves. A key thrust for most of the medium and large firms is to capture a share of the worldwide market for generic drugs, which is valued at more than $100 billion, most notably in the lucrative U.S., European and Japanese markets:

--More than 30 Indian companies compete in this area, alongside rivals from countries such as Israel (most notably Teva), and from regions like Eastern Europe and Latin America.

--These companies have gained substantial experience in less regulated markets in parts of Africa, Asia and Latin America, producing off-license drugs originally produced by the large international firms.

--They are seeking greater access to the North American market through U.S. partners and, increasingly, through their own U.S. subsidiaries.

While the U.S. Food and Drug Administration is now more vigilant about malpractice by Indian firms, it has not substantially slowed the growing number of approvals that are being processed for generic drugs developed in India.

Major players. Indian Pharma has also spawned its own contract research outsourcing industry, particularly focused on the research necessary for clinical trials. This is an area of rapid growth. Clinical trials outsourcers now have their own global presence, each serving producers with increasing levels of precision, reliability and efficiency:

--A study by the Organisation of Pharmaceutical Producers of India suggests that this industry will expand from $400 million in turnover during 2007-08 to $1.3 billion in 2011-12 and $3 billion in 2015.

--One large research company, Advinus (which is associated with the Tata conglomerate and has strong international links), recently announced a tie-up with one of the largest clinical trials companies, GVK Biosciences, part of the GVK Reddy group.

--These are fairly new firms, but most others have built their balance sheets over some time. The oldest is Cipla, a 65-year old company with historical associations with Mahatma Gandhi that has developed a new strategy for getting retrovirals and other acute disease treatments cheaply into developing countries, despite opposition from the large international drug firms.

Backed by a large and underserved domestic market, and with massive growth potential in generics exports and research outsourcing, Indian Pharma is primed for substantial expansion. Its firms will see strong growth and good operating margins this year, both in the domestic drug market and in most of their multiple international ventures.

Pharma companies headed for slower earnings growth: analysts

Mumbai/New Delhi: Indian pharmaceutical firms are likely to post a decline in earnings growth for the quarter ended 31 March as they take a hit from mark-to-market and foreign exchange losses and regulatory action in export markets.

With top players set to announce results this week—beginning with Wockhardt Ltd on 21 April—the average growth in sales in the sector for the quarter is likely to be less than 11%, compared with 14% for the corresponding quarter last year.

Declining sales: A scientist works in a Sun Pharmaceutical laboratory in Mumbai. The average net profit of the Top 10 listed drug makers in India, including Sun Pharmaceutical, is likely to increase by around 9%. Bloomberg

The projection is based on a Mint analysis of results previews by five brokerages—ICICI Securities Ltd, Motilal Oswal Securities Ltd, Angel Broking Ltd, Prabhudas Lilladher Pvt. Ltd and Sharekhan Ltd.

The review showed that the average net profit for the Top 10 listed drug makers—including Ranbaxy Laboratories Ltd, Cipla Ltd, Sun Pharmaceutical Industries Ltd, Dr Reddy’s Laboratories Ltd, Aventis Pharma Ltd, GlaxoSmithKline Pharmaceuticals Ltd, Piramal Healthcare Ltd, Wockhardt Ltd, Cadila Healthcare Ltd and Lupin Ltd—will increase only by 8.8%.

Ranbaxy, the country’s largest drug maker, controlled by Japan’s Daiichi Sankyo Co. Ltd, will likely post a net loss, largely on account of forex losses and a ban on sales in the US on a chunk of its drugs.

Increased interest cost on outstanding foreign currency debts, mark-to-market (MTM), losses and a high income base effect from the corresponding quarter last year are the key reasons cited for the decline in profits. Market-to-market is an accounting practice that values an asset or a liability at current market prices and not at cost.

For several companies, regulatory action in the key export markets such as the US and Europe, coupled with shrinkage in the domestic markets is expected to have had an adverse impact on revenues.

“Operationally, the growth will be strong for Indian pharma companies. The numbers from January to March have been pretty good for the Indian market at least,” said Hemant Bakhru, a pharma analyst with the Hong Kong-headquartered stock broking firm CLSA Ltd. “The export margin will benefit due to the depreciation of the rupee, though concurrently there will be forex losses for companies like Ranbaxy, Biocon (Ltd) and Cipla.”

“With the rupee depreciating by 6.5% in the quarter-on-quarter comparison, many pharmaceutical companies would face MTM transnational forex losses on outstanding foreign currency loans and hedges,” said Motilal Oswal’s preview on pharma earnings.

For example, Ranbaxy and Jubilant Organosys Ltd are likely to report significant MTM losses on foreign currency loans and hedges, though the exact quantum of such losses will depend on the closing rupee-dollar exchange rate on 31 March, the Motilal Oswal report said.

The expected growth of the pharmaceutical companies is lower than that seen in the previous quarters due to a general slowdown in the domestic market—which moderated to 10.8% in this quarter compared with 12-14% in the preceding quarters—and the high base of the year-ago quarter for companies such as Sun Pharmaceutical and Glenmark Pharmaceuticals Ltd, said an earnings analysis by Sharekhan.

During the January-March quarter of 2008, revenues of Sun Pharmaceutical and Glenmark were boosted by their exclusive marketing rights in the US. For Glenmark, a one-time milestone payment that it received from licensing its original research molecules was added towards overall revenue in that quarter. This time, however, there are no such gains.

Sun Pharmaceutical’s revenue from the US market was boosted in the 2008 January-March quarter by its six-month exclusive right in the US generic market for three drugs—Oxcarbazepine, Pantoprazole and Ethyol.

Glenmark, too, had recorded a high margin in the year-ago quarter due to the receipt of milestone income and Oxcarbazepine exclusivity in the US.

In the quarter under review, Sun Pharmaceutical’s US sales, however, were affected following the US drug regulator’s action against its US subsidiary Caraco Pharmaceutical Laboratories Ltd. The regulator held up all new drug approvals for Caraco, though its sales by sourcing products from India remained unaffected.

In the case of Cadila Healthcare Ltd and Torrent Pharmaceuticals Ltd, Sharekhan said, rising staff costs and foreign exchange losses on trade receivables would cause margin pressure.

Ranbaxy will also see declining US revenue and the impact of the import alert will be felt this quarter. For Sun Pharmaceutical, Caraco will be weak since there have been no fresh drug approvals for the company in the US, said Bakhru of CLSA.

The higher interest and depreciation costs (due to acquisitions and/or expansion in capacities) would also affect profits of Cadila, Orchid Chemicals and Pharmaceuticals Ltd, Ipca laboratories Ltd and Opto Circuits India Ltd.

According to another pharma analyst in Mumbai, who didn’t want his firm or himself to be identified, companies with a presence in India and the US will do well but those with high exposure in emerging markets will continue to feel the pinch of trade-level destocking and cross-currency fluctuations.

“Overall, it will be a mixed quarter. Aggregate numbers will not be impressive because three large companies—Ranbaxy, Glenmark and Sun Pharma—will report lower numbers,” he said.