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Corporate Profile

Seven years after Dr ParvinderSingh, the founder of RanbaxyLaboratories passed away, hisscions have quietly re-asserted

control on the family firm, after letting pro-fessionals run it in the interregnum. A mid-January announcement made by the com-pany, stated that Dr Brian Tempest, untilrecently chairman, would continue to stayon as chief mentor and vice-chairman. AndParvinder’s eldest son Malvinder Singhwould take charge as CEO and MD. Thechange of guard was one more reason forinterest to remain high in the country’slargest pharmaceutical company.

Naturally, the big question is where will

RanbaxyLaboratories, India'slargest pharmaceuti-cal company, hastaken on globalmajors as it seeks todominate the generics market. N Chandra Mohanreports on the company's strategyto make it to theworld's big five inthe business

THE CHANGE OF GUARD: New CEO & MD Malvinder Singh (left) with Dr. Brian Tempest

The Challenges ofGoing Global

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Malvinder take Ranbaxy? Will he carry for-ward his father’s vision or have one of hisown? Malvinder himself answers that bystating that Ranbaxy has realised prettymuch of what his father had envisioned. DrSingh wanted it to become a research-based international pharmaceutical compa-ny with revenues of $1 billion and thedevelopment of a new chemical entity.Ranbaxy’s international drive was kickedoff during his lifetime itself and the compa-ny now serves customers in 125 countrieswith manufacturing facilities in nine coun-tries.

With sales of $1.2 billion in 2005, thecompany earns 80 per cent of its revenuesoutside India. By supplying cheaper ver-sions of patented AIDS drugs, companieslike Ranbaxy have forced global giantsmaking these drugs to slash prices. Thisgiant, whose business is making cheaper

knock-offs or generic versions and floodingthe world market after the patents expire,now aims to hit $2 billion in sales in 2007and $5 billion by 2012. It also wants tobecome one of the top five generic compa-nies. Towards this end, Ranbaxy is pursu-ing a ‘handful’ of acquisition opportunitiesin US and elsewhere, as Malvinderinformed Reuters during the recent WorldEconomic Forum Annual Meeting at Davosin January 2006.

To realise sales of $5 billion, having amajor presence in the US is imperative.Ranbaxy entered the US way back in 1995and has targeted this market to account forhalf its revenues — an objective that isclose at hand with $350 million revenuesin 2005. Branded drugs worth $55 billionare expected to go off patent in the USalone by 2010, which can boostRanbaxy’s exports manifold. Obviously,

the US remains a “key priority”, felt itsnew MD and CEO, who significantlyadded, “we need to gain critical sizethrough acquisitions”, in his media interac-tions at Davos.

Ranbaxy’s assault on the US market,however, is far from easy. One of the mostdaring legal challenges in recent times wasits challenge of US drug major Pfizer’spatents on a drug that reduces cholesterol— marketed as Lipitor — that has annualsales of $12 billion. Pfizer has a monopolyon this drug at least until 2009 butRanbaxy wanted this protection overturnedso that it could launch a generic version. InDecember 2005, however, the US DistrictCourt ruled against the Indian MNC. Thecompany will certainly appeal as its chal-lenge holds out the prospect of earning$800 million from the generic version.

Its US ambitions also were pressured by

STRIVING TO ACHIEVE SUPERSTAR STATUS IN THE GLOBAL GENERICS BUSINESS: Technicians at work in a Ranbaxy laboratory

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CORPORATE PROFILE

the continuing price erosion in the intense-ly competitive generics market wheresome drugs sell for five per cent of theprice of their branded counterparts.Ranbaxy’s US sales plunged by 22 per centand impacted on Ranbaxy’s global salesthat remained flat at $1.2 billion while netprofits dropped by 62 per cent to $154 mil-lion in 2005. This erosion is bound to force

the company to diversify sales to Europeand Japan that is the world’s secondlargest pharmaceuticals market.

These developments triggered a free fallin its scrip in Indian bourses by over 60 percent in 2005. For a sense of perspective inend-January 2006, the scrip was tradingon the National Stock Exchange at Rs393.20 (approximately $8.7) per share. In

contrast, in January 2005, its averagemonthly price was as high as Rs 1,120.30.The Ranbaxy scrip lagged behind the boomin India’s benchmark indices in a big way.The re-assertion of family control over thecompany after a gap of seven yearsoccurred under these circumstances.

Back to Dr Singh’s vision, it is not sowell known that he often expressed hispreference for greater professionalisation inrunning Ranbaxy. Although the promoterfamily controls more than 32 per centshares, he stonewalled demands to inducthis sons onto the board, as he believedthey had to earn that right through merit.Dr D S Brar was his chosen successor totake forward what he had in mind for thecompany, and the latter was MD and CEOof Ranbaxy till he abruptly quit inDecember 2003.

This drive for professionalism continuedwith Tempest succeeding Brar as MD

and CEO. This was also when Malvinderentered the board, besides being promotedas president (pharmaceuticals). No assess-ment of Brar’s (and Tempest’s as well)tenure as Ranbaxy’s CEO would be com-plete without taking into account their rolein the internationalisation of Ranbaxy. Dr Singh had the overarching vision but

Brar implemented it, including the pioneer-ing decision to set up shop in China in the1990s. It was Brar who stated thatRanbaxy’s strategy would be dictated byits US strategy.

Malvinder clearly has a tough act to fol-low. But to be fair to him, there is simplyno a priori basis to infer that he is not up tothe job. Or that he would not carry forwardDr Singh’s vision. The real issue is whatbest serves Ranbaxy’s interests as a com-pany. In this regard, there is a tensionbetween two regimes in the history ofRanbaxy — between the ancien regimerepresented by the founder Dr Bhai MohanSingh, Dr Parvinder Singh’s father, andthe modern one inspired by Dr Singh andhis chosen successors like Brar. Both arealive ‘n kicking in their own ways despitethe demise of Dr Singh.

Ranbaxy’s future clearly depends onwhich of these regimes the young promot-er will align with. As is well known, Dr Singh in his lifetime had to fight many

Malvinder Mohan Singh, the new CEO &MD of Ranbaxy Laboratories, spoke atlength to N Chandra Mohan on his com-pany's plans for the future. Excerpts:

On the Lipitor judgement's significance:Lipitor's largest market is America,

our most important market. The US cur-rently accounts for 35-40 per cent of ourglobal sales at present. We have a strongand robust intellectual property rightscase. In the US market, the successfulgeneric challenge to Lipitor will haveexclusivity for 180 days. This system isan incentive to generic companies to

challenge patents. It will open significantopportunities for Ranbaxy to produce anaffordable product for the people.

On Ranbaxy's growth engines:Besides the US, the other growth

engines are the European Union. Ourbasic focus is to strengthen our front-end business in the US, Japan and EU.We have a long-term strategy that weare working on for the Japanese market— the second largest pharmaceuticalsmarket in the world that has a lowgenerics penetration. We have increasedour stake from 10 per cent to 50 percent in joint venture with NipponChemiphar Co Ltd.

On his father's vision of a research-based international pharmaceuticalscompany:

We have already realised that vision.We are research-based as our R&Dexpenditures are in the region of $100million. We are international as we haveground operations in 46 countries andmanufacturing operations in seven,besides catering to customers in 125

countries. And we are 100 per cent inpharmaceuticals. Ranbaxy seeks a lead-ership position in all its key markets.

On looking out for big-ticket acquisi-tions:

We are open to big-ticket acquisitions.We are looking at prospective candi-dates. The question is what will it pres-ent us? Size? Technology? Distribution orreach? Ranbaxy is already among the top10 leading generic companies in theworld. If we are to soon improve ourposition to the top 5, such an acquisitionis definitely part of our plans.

“WE ARE OPEN TO ACQUISITIONS”

On the WebRanbaxy Laboratories: www.ranbaxy.com

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boardroom battles to exorcise his father’sinfluence, including adapting to the bravenew world of product patents and trans-forming Ranbaxy into a research-basedinternational company. The ancien regimewas content with reverse-engineeringpatented drugs while Dr Singh realised thatthis was no more possible as India one daywould be a signatory to WTO’s trade-relat-ed intellectual property rights (TRIPS)agreement.

To his credit, Malvinder so far has cho-sen to take forward his father’s vision

as the biggest challenges lie ahead forRanbaxy. Coping with the transition to aproducts patent regime effective fromJanuary 1, 2005 is not going to be easy.To survive, it would have to ploughresources into R&D, patent its moleculesand develop novel drug delivery systemswhich lead to proprietory ‘platform tech-nologies’. Ranbaxy arguably is in a betterposition to meet these challenges as it isalready one of the top 10 generic compa-nies in the world and has a war chest of$150 to $250 million for acquisitions tofortify its presence abroad and become oneof the world’s top five generic companies.

To become a truly research-based com-pany, however, Ranbaxy must move upthe value curve (see box) and take a crackat evolving its own drugs that can one daybe patented. Admittedly, that task looksonerous as global drug majors invest hun-dreds of millions to produce a drug whilethe total R&D resources at the commandof Ranbaxy are no more than $100 millionat best. There is, therefore, no escape fromforging joint ventures and alliances withglobal majors to participate in drug devel-opment. At present, the company has analliance with GlaxoSmithKline for develop-ing new drugs.

“We plan to go in for more alliances forexpanding our new drug development pro-grammes and are already in talks with afew multinational companies,” admitted thenew CEO and MD of Ranbaxy. All eyes willtherefore be on the success of its firstforay into developing an original anti-malar-ial drug, which is currently in Phase 2 trialsand could be approved by 2008. WhenMalvinder successfully implements Dr Singh’s vision for a new chemical entity,perhaps then the decks will be truly clearedfor the young scion to evolve an overarch-ing vision of his own for Ranbaxy.

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CORPORATE PROFILE

INDIA'S pharmaceutical giants likeRanbaxy Laboratories Ltd, Reddy'sLaboratories and Wockhardt, among oth-ers, are making moves to secure a biggerglobal presence, especially in markets likethe US. Having developed a capability toreverse-engineer patented drugs,because the previous patents law in Indiaprotected only processes not products,they have trained their sights on the glob-al generics market. The strategy is simpleenough: Wait patiently for drugs to go offpatent and then flood the world marketwith cheaper generic versions. Ranbaxy'srevenues from the US generic businessthus are expected to rise to $1.2 billionby 2008.

In the generics business, margins arewafer-thin due to competitive conditions

in the developed markets. They improvewith branded generics and keep improv-ing as one moves up the value chain tofinally making patented drugs. Despitesuch constraints, however, Ranbaxy ismoving up the value curve: from bulkdrugs and intermediates to generics andconventional dosage forms. Then on tovalue-added and branded generics andlater to new drug delivery systems.Moving up such a curve improves thebottomline as margins on bulk sub-stances and intermediates do not exceed10 per cent but go up to 100 per cent ormore for new drug discoveries.

The last-mentioned is the Holy Grailfor Big Pharma but Ranbaxy does nothave resources to produce new drug dis-coveries pegged at $800 million per drug.There is no choice but to plough moreresources into R&D and form strategicalliances with MNCs. Ranbaxy has hadearlier alliances with Eli Lilly and its cur-rent development of an anti-malarialdrug, Rbx11160, could be an exemplarfor the future as the financial risk wasabsorbed by a Geneva-based non-profitorganisation, Medicines for MalariaVenture.

MOVING UP THE VALUE CURVE

Ranbaxy’s growth spurt

* 9 months Apr-Dec. Indexation based on annualised figures for 9 months ended 31.12.98 $1=Rs45 approximately Source: Annual reports

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