Ranbaxy's sweetheart Lipitor deal just turned sour. Here's why

Ranbaxy has paid a heavy price to clear its issues with the US health regulator. The company announced that it has signed a consent decree (a voluntary agreement between the two parties for withdrawal of charges) with the US Food and Drug Administration to lift a ban on the import of drugs from certain

manufacturing plants in India. The company is expected to shell out $500 million (approximately Rs 2,638.74 crore) for settling the issue, which works out to Rs 43 per share (post tax).

The company is providing the above-mentioned amount to take care of any potential civil and criminal liabilities that could arise from the investigation. This is substantially higher than the market expectation of $200-350 million. “This is an incremental negative as the penalty is on the higher end of our expected range of $200 million to $500 million,” Nomura said in a note. No doubt then that the stock is trading 2.3 percent lower at Rs 385.50.

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The FDA accused Ranbaxy in 2009 of falsifying data and test results in drug applications, and it halted reviews of drugs made at the company’s plant in northern India.The FDA banned the import of Ranbaxy’s various generic formulations in 2008, citing compliance issues.

Angel Broking said in a note that while it was unclear whether the deal represented a full and final settlement with the FDA, “it is a positive development towards a resolution.”

However, this settlement will eat away the benefits amounting to $600 million that analysts have built in from Lipitor sales during the six months of exclusivity period. In order to offset the impact, Ranbaxy’s current promoters, Daiichi Sankya has cut salaries of the company’s executives.

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Though the consent decree lays out a plan of action as agreed by the two parties to resolve the outstanding issues, no timeline has been mentioned. Any delay in getting the clearance is likely to further impact the company’s profitability.

Meanwhile Ranbaxy remains confident on the prospect of its generic version of Lipitor. The company expects to maintain its markets share post completion of its exclusivity period. Reports say that Pfizer, the originator of the drug, has already lost 50 percent of its market share. However, 80 percent of the loss in share by Pfizer was captured by Watson, with Ranbaxy getting only residual. The company’s margin are expected to be lower as it is manufacturing the drug from its US facility.

Ranbaxy is currently down 2 percent at Rs 386.40 on the Bombay Stock Exchange.