Last month, Sun Pharma bought about 64% of Ranbaxy from Daiichi Sankyo for $3.2 billion, a move that surprised many industry observers. Indian entrepreneurs are used to, and comfortable with, selling companies to multi-national corporations. Until now, however, they have not sold pharma businesses to competitors in India. Sun’s acquisition of Ranbaxy is first of its kind and scale.

Ranbaxy, which had gone from rising star to troubled company in a single decade, had become a case study in cross-cultural business relationships and due diligence gone wrong. For its Japanese parent, Ranbaxy had become a (roughly) $2-billion mess, as the challenges of working with India-based management, and assessing the financial impact of inadequate quality control and assurance, became increasingly apparent.

Daiichi’s experience has a lot to teach pharma.  Will the industry learn? It had better learn fast. This is an extremely competitive and challenging time, when payers demand value and results, and the public cries out for affordable pharmaceutical products¹.

Ranbaxy had been on a fast track when it started supplying generic drugs to the developed countries. The World Trade Organization opened the floodgates, as high profit margin countries became the company’s growth markets.

Fast growth resulted in expansions. However, profits and growth led to overconfidence and need to supply the growing markets likely led to short cuts in manufacturing and supply chain.

Issues with FDA in the U.S. came to light in 2006, but Ranbaxy’s compliance and quality problems had remained under the surface for several years.  This was due mainly to understaffed regulatory agencies in developing nations, but also at FDA and EMA.
Now that global regulators are staffing up and increasing their scrutiny of manufacturing operations, problems at Ranbaxy continue to bubble up to the surface. We can expect to learn about more of these over time.

Was Daiichi’s Due Diligence Sufficient?
Given Ranbaxy’s quick early rise, it’s not surprising that Daiichi Sankyo saw the company as an opportunity.  However, Ranbaxy’s regulatory relationship time line² and whistle blower’s account³ suggest that its Japanese parent’s due diligence was incomplete. 
One wonders:  Had Daiichi’s senior  managers consulted with their counterparts at Suzuki, a Japanese company that had been operating in India since 1982, to learn about the methods and challenges of operating in India? A discussion would have revealed many of the issues and challenges that Daiichi was going to face in its relationship with Ranbaxy⁴.

Did Daiichi do any of the following, one wonders:

• Place the right staff at every site and within the management infrastructure of the acquired company from “day one” of the acquisition?
• Understand the psychology of Ranbaxy’s staffers?
• Grasp the competency of Ranbaxy management?”

Based on ongoing citations and consent agreements, it is obvious that they did not.  The India-based management team, in turn, did not seem to understand the implications of FDA actions or did not fully convey the information to Daiichi management in Japan.  Meanwhile, at the top levels, Daiichi Sankyo’s management did not seem to understand the financial implications of what was going on at Ranbaxy.

In March 2013, Arun Sawhney, Ranbaxy’s managing director claimed to have taken steps to improve quality⁵. However, putting a new board and new executives in place does not guarantee improved quality.  Only staffing operations with skilled and competent people can allow this.  From continuing FDA citations, it was clear that Ranbaxy/Daiichi did not have the right plan in place.

In any acquisition, “due diligence” means a lot more than simply reviewing financial statements and portfolios.  The buyer has to be aware of what is going on the plant floor, in research and development labs and quality, regulatory affairs and other support functions.  Relying too much on a paper review is recipe for failure, for any manufacturing company and particularly a highly regulated, global one.

I fault Daiichi for trusting what was presented to its management, rather than verifying, by digging into the company’s plant and laboratory operations.

Ranbaxy’s management did what it needed to do to clinch a sale. But even the Indian firm may pay for this, years later.

Daiichi Sankyo and the Singh family (majority stock holders prior to sale) are currently in litigation over the sale. Did the Singhs present what was going on within the company? Did Daiichi understand the implications of what it was presented, or even more importantly, what it didn’t hear about?

Control Over Processes, Procedures and Training
Were any steps taken to study procedures and compliance, and documentation?  Did anyone look into supply chain management? Did Ranbaxy have the required level of control over its processes, procedures, training and supply chain management? Regulatory citations suggest that it didn’t, and the number of these citations just kept mounting over time.

Even remediation efforts were incomplete, as Ranbaxy turned to consultants, who “fixed” the documentation without appearing to deal with the underlying processes. Much time, effort and money were spent without meaningful results.

Daiichi/Ranbaxy had an exceptional opportunity to change the global generic pharma landscape if they had done their due diligence correctly but it seems that they did not get to the starting line. They not only overpaid for the acquisition but also got rooked. Based on Ranbaxy’s ongoing issues, there are questions about Indian management style⁶ and what might be learnt⁷ from the recent Ranbaxy citations.

Assimilation is going to be very turbulent. There will be personal, and personnel, issues. It will be interesting to see if and how yesterday’s peer-to-peer challenges morph into boss-subordinate issues. Another fact that Sun must deal with is the availability of competent and trained personnel who are attuned with global quality and competitive values. Sun Pharma’s succession planning and/or lack of it could also influence the merger.

Mylan’s acquisition of Matrix, India was well executed and can be a case study. How Mylan deals with Agila, its new acquisition, could be an interesting application of its past experiences⁸.

Sun Pharmaceuticals’ senior management must make it their first priority to address the compliance issues. They will also have to address issues of personnel, personal relationships and accountability. All these will be new issues for Indian company management, as, generally, the current relationships are different from what most of us are used to in the developed countries.

Besides people issues, Sun should review the current business model and study how better manufacturing technologies might be introduced in the manufacture of API and their formulations.

Taking a “process centric” rather than a regulation centric approach⁹ would offer opportunities to transform the pharma business model, and the whole landscape, allowing for permanent quality improvements and exceeding baseline regulatory requirements. Perhaps continuous formulation practices might be used, and opportunities exploited for continuous manufacturing of API (active pharmaceutical ingredients).

What are your thoughts?  Please write in and let us know. 

References

1. Malhotra, G., Increasing Profits by Reaching Pharma’s Silent Majority, PharmaEvolutioncom, August 5, 2013 http://www.pharmaevolution.com/author.asp?section_id=487&doc_id=560741.
2. Dey, S., A Look at Ranbaxy’s Chequered Legacy, Business-Standard.com, http://www.business-standard.com/article/companies/ranbaxy-s-troubled-legacy-a-timeline-114040700254_1.html
3. Eban, K., Dirty Medicine, Fortune-cnn.com, http://features.blogs.fortune.cnn.com/2013/05/15/ranbaxy-fraud-lipitor/
4. Malhotra, G., Ranbaxi and Daiichi Sankyo Relationship, Profitability Through Simplicity blog, June 11, 2008. http://pharmachemicalscoatings.blogspot.com/2008/06/ranbaxy-and-daiichi-sankyo.html
5. Ranbaxy Has Taken Steps to Ensure QC: Arun Sawhney, The Economic Times, May 22, 2913. http://articles.economictimes.indiatimes.com/2013-05-22/news/39445234_1_ranbaxy-laboratories-managing-director-arun-sawhney-daiichi-sankyo
6. Malhotra, G., Letter to Indian Pharma CEOs: Have You Lost Your Chance to Innovate? PharmaEvolution.com, July 26, 2013 http://www.pharmaevolution.com/author.asp?section_id=487&doc_id=560658&
7. Malhotra, G., What Do the Recent Ranbaxy itations Teach?  Profitability Through Simplicity blog, http://pharmachemicalscoatings.blogspot.com/2014/02/what-do-recent-ranbaxy-citations-teach.html
8. Malhotra, G., The Nail That Sticks Out Could Change the World: When Culture Stifles Innovation, PharmaEvolution.com, November 14, 2013. http://www.pharmaevolution.com/author.asp?section_id=487&doc_id=561867
9. Malhotra, G., Imagine…a Process-Centered Pharma, PharmaEvolution.com, September 11, 2013. http://www.pharmaevolution.com/author.asp?section_id=487&doc_id=562371

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Girish Malhotra
EPCOT International

Girish Malhotra, President and founder of Epcot International, has over 43 years of industrial experience in pharmaceuticals; specialty, custom, and fine chemicals; as well as coatings, resins and polymers, and additives. His expertise ranges from manufacturing to process and technology development and business development.