THE BIG QUESTION - IS RANBAXY A GOOD BUY NOW?

By Ruma Dubey

We woke up once again to the news that US FDA has banned imports to USA from Ranbaxy due to manufacturing violations. The FDA said Ranbaxy is prohibited from making and distributing pharmaceutical ingredients from its facility in Toansa in Punjab, to prevent substandard quality products from reaching US consumers. The US FDA has stated that it has identified significant violations of sound manufacturing practices.  The staff at the Toansa facility were found to have re-tested raw materials and other ingredients after the items failed analytical testing.

This seems like an ongoing saga between Ranbaxy and the US FDA, with one facility after the other coming under the scanner. If one may recollect, it had begun last year when Ranbaxy had pleaded guilty , accepting the felony charges and it has also agreed to pay a criminal fine and forfeiture totaling $150 million and to settle civil claims under the False Claims Act and related state laws for $350 million. A whopping $500 million and not to mention the loss of face. These were felony charges relating to the manufacture of certain adulterated drugs at two of Ranbaxy's facilities in India and their distribution.

Ranbaxy is not surprisingly, the top loser currently on the BSE though it has not exactly tanked down to a new low. It’s just down in the red.

So the big question being asked – is Ranbaxy is a good buy at these levels for the long term as an investor? If one were to look at things purely as a stock, with no emotions involved, surely the strong Japanese management and these issues of FDA will eventually be resolved. “Sab theek ho jayega. We all are firm believers in this age-old dialogue and thus, things will indeed look up.

But the dilemma is when you look at the stock as an ethical investor. The market, a capitalist, more than the US FDA observations and the loss of reputation, the long run is a better story. But what about a corporate governance issue? What about the fact that Ranbaxy was selling adulterated drugs?  This is a huge issue of corporate governance, one of the worst cases ever.

For the market, material impact is all that matters but what about the fact that the company, an Indian company at that, has consistently violated manufacturing norms, has itself accepted that it manufactured adulterated drugs in USA? Isn’t that a big shame? Does it mean that because Ranbaxy is today under a Japanese management, it will suddenly get viewed differently?  

There are other companies too apart from Ranbaxy which have been pulled up by US FDA. Remember Hospira? US FDA found serious lapses in manufacturing of drugs at its Sriperumbudur unit. The US agency hd warned the firm that this could result in drugs made at the plant not being allowed entry into the US. Hospira entered into an agreement in March 2010 to buy the factory from Orchid Chemicals which makes generic injectable finished dosage. Other companies which have come under the scrutiny have been RPG Lifesciences, Dabur and these were either for their manufacturing practices or products. Companies like Sun Pharma, Cadilla, Dr.Reddy’s, Glenmark Pharma and Lupin had to recall some of their key drugs from the US market. So over the past few months, Indian pharma companies have been facing increasing heat from the US FDA.

In India, adulterated drug is common news; it happens all the time. But the developed countries, especially USA does not view it as common news; it is a serious crime. Yes, under Daiichi, the company will turn into a new leaf but the blotch left on Indian pharma companies will be hard to erase. As such India is viewed as an extremely corrupt nation and such cases just go on to reiterate this fact further. Henceforth Ranbaxy getting back to business in full swing and US FDA gaining full faith will be thanks to the Japanese management. But Indian pharma companies will probably face more scrutiny that before.

Surely Ranbaxy will now have to work harder to establish its new brand name, maybe change to Daichi and blot out the name of Ranbaxy completely. The new management will have to work on bettering its relation with the US FDA and try and gain back the trust. Yes this is sure to happen but it will take some time.

So would you buy the stock now? Makes no sense, as there will be a few more quarters of pain. But for a long term investor, it could be an opportunity as Ranbaxy is sure to bounce back.

But more importantly, as an ethical investor, will you buy Ranbaxy? There is a tremendous loss of trust and that will take more time to repair than the operating margins.