Bhupesh Bhandari: Intrigue in white lab coats

By : Bhupesh Bhandari
Last Updated: Thu, Dec 08, 2011 19:51 hrs

On Wednesday, Ranbaxy put out an advertisement in the newspapers thanking everyone for their support in developing and launching atorvastatin in the US, which is the generic equivalent of Pfizer’s Lipitor. A cholesterol-lowering agent, Lipitor is the world’s largest-selling drug ($7.8 billion in the 12 months to September 2011, in the US alone). Ranbaxy has exclusive marketing rights for the next six months. It will share the profits with Teva of Israel, which has led analysts to believe that it will supply the raw material because the Ranbaxy factories in India (Devas in Madhya Pradesh and Ponta Sahib in Himachal Pradesh) are being investigated by the US Food & Drug Administration (USFDA). The upside to Ranbaxy, they say, could be close to $500 million, in spite of the cut to Teva.

After a long wait, the company’s shareholders have some good news. Ever since the Singh brothers sold it to Daiichi Sankyo of Japan in 2008, Ranbaxy has had to contend with a lot of bad press: the problem with USFDA, churning at the top and serious foreign exchange losses.

The Lipitor incident also provides us with some insight into the pharmaceutical world, where science rubs shoulders with greed and intrigue. In 2000, Ranbaxy was owned by the Singh brothers and was run by Devinder Singh Brar. The company reflected the aggression of its Punjabi owners and CEO. That year, Brar formed an inter-disciplinary team to look at blockbuster drugs whose patents could be challenged. He was aware that innovator companies were doing everything they could to prolong the life of their drugs through the “evergreening” of patents — one small innovation was enough to thwart the challenge from generics. Lipitor was identified as an opportunity. Two patents, this team said, could be challenged in the courts.

Lipitor was actually an innovation from Warner-Lambert, the result of 13 years of painstaking research. Even when it was under development, Pfizer knew that it could perhaps become a blockbuster. It, thus, got into a co-marketing alliance with Warner-Lambert for the US in 1997. In 2000, it acquired Warner-Lambert. Lipitor became its crown jewel. The seriousness of the Ranbaxy challenge came to light in August 2003 when Smith Barney cut its rating on Pfizer from “outperform” to “inline”. It said that it disagreed “with the consensus view that the Lipitor patent challenge is frivolous”. Pfizer, of course, dismissed the report. Still, Pfizer’s shares fell as much as four per cent in a day (August 13), shaving off almost $7 billion from the company’s value. Back home, analysts wasted no time in calculating the windfall that would accrue to Ranbaxy.

Since then, innovator companies have become wiser. They know that the new drug pipeline has more or less dried up. There has been no blockbuster after Lipitor, Viagra (Pfizer) and Cialis (Eli-Lily). So they have taken serious steps to safeguard their patented drugs from generic challengers like Ranbaxy. One such tactic is authorised generics: the innovator may license a friendly company to market the generic drug and take its share of the profits. Thus, Ranbaxy will have to share shelf space with Watson which has been authorised by Pfizer to make generic atorvastatin.

And, of course, there is expensive litigation. Innovator companies know that patent attorneys come expensive; so, after a while, generic challengers lose their appetite for a fight. It was litigation that threatened to delay the launch of Ranbaxy’s atorvastatin in the US. Some years back, before Ranbaxy became a Daiichi Sankyo subsidiary, the company came to a settlement with Pfizer. The details are not known, but it allowed Ranbaxy to launch in the US, albeit with a year’s delay. There were critics at that time: Ranbaxy had lost its nerve and missed out on a windfall, they said. In hindsight, that perhaps was the right thing to do. It brought certainty to the company’s business model. And at least it got to launch the drug.

There was talk at the time of Ranbaxy’s sale to Daiichi Sankyo that a leading American company offered to make a counter-bid. It perhaps wanted to lay its hands on Ranbaxy to kill some patent challenges. It never came to be known which drug was being challenged — knowledge that would have given away the identity of the predator.

The problems with USFDA began soon thereafter. And when Malvinder Singh, the outgoing promoter, left the company’s management in 2009, it was read as a signal from Daiichi Sankyo to USFDA that it was ready to turn things inside out at Ranbaxy. The Japanese parent took this step, even though Singh’s severance package came to $10 million.

It is the failure to discover new drugs, according to the lobby group Indian Pharmaceutical Alliance (IPA), that’s driving the acquisition of Indian generic companies by pharma MNCs. It is not for cheap ingredients – for that they need only go to China – but for the patent challenges they have made. And once they are acquired, IPA alleges, the Indian arm begins to go slow on patent challenges. In the absence of new blockbusters, this is all innovator companies can do to keep their profits going and their shareholders happy. Look at it differently: owners of Indian pharmaceutical companies that have made serious patent challenges know they have a blank cheque that they can draw on whenever they want. And private equity also knows there is an excellent opportunity for arbitrage. They can buy Indian companies that have made patent challenges abroad cheap and sell them to innovator companies for a profit.

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