The Cost Of Going Global

If Ranbaxy is feeling the pressure to consolidate its operations that's because the cost of globalisation could prove high even for a company with reserves in excess of Rs 1,466 crore. Here's how the cost breaks up. The average expenditure involved in getting a generic approved in the US (by filing what is called an Abbreviated New Drug Application or ANDA) is $350,000-500,000. Ranbaxy has been filing 12 a year thus far and hopes to increase this to 15 shortly. That's a cool $5-7.5 million a year. Then there's the time involved-two years, for the US. Filing ANDAs could also involve a fair bit of litigation: Ranbaxy is involved in several such, the most high-profile one being its spat with GlaxoSmithKline over Cefuroxime.

There's also a research angle to Ranbaxy's internationalisation drive. In 2000, Ranbaxy spent $15.3 million on R&D. Today, 35 per cent of this is accounted for by research in NDDR and NDDs, but this proportion is expected to increase to 70 per cent by 2004. By then, the company's R&D spend could be as high as $60 million. The remainder (30 per cent) will go into creating the right mix of products and the backward integration of complex molecules-both critical to succeeding in emerging markets like India and some other countries in Asia and Africa. The bulk of Ranbaxy's research budget, though, will continue to be allocated to the ANDAs-thrust, NDDs, and NDDR. The company is trying to experiment with delivery forms to reduce side-effects on existing drugs apart from making them easier to consume. In 2000, it developed a once-a-day formulation of Ofloxacin using its patented gastro-retentive technology. This product is currently undergoing phase III trials and is scheduled to be launched in India before the end of 2001. Ranbaxy's target is one NDDs product every 12-18 months. And in NDDR, the company's focus is on products in the urology, respiratory, anti-bacterial, and anti-fungal domain. One of the company's 'entities' (that's what these are termed) is in the second phase of clinical trials, IND (Investigational New Drug) filings are being made for another three, and one is in the pre-clinical trial phase.

The emphasis on R&D is understandable given Ranbaxy's mission statement, but it is a path fraught with risks. The company doesn't have the resources-human and financial-that its large transnational rivals like Pfizer and GlaxoSmithKline do. Pfizer, for instance, will spend $5 billion on R&D this year. Ranbaxy also doesn't have much to show in NDDR. It has met with some success in NDDs, but drug delivery is a competitive area: at any given time, several companies could be working on the same product. Despite its much-vaunted expertise in research, Ranbaxy's portfolio of offering looks incomplete. It boasts drug intermediates, raw material, custom synthesis products, commodity generics, branded generics, and some delivery system products. What it does not have are prescription research (and therefore patent protected) products, andas for delivery system products (the clinical trials are yet to be completed, so these haven't become proprietary products), and OTC (Over The Counter) products.

''You'll see all these coming the next four-five years,'' says Brar. As will, the company claims, proprietary products from other drug majors. The Ranbaxy of the future, then, will be a hybrid company with generics as well as proprietary products-either through its own research initiatives or through licensing arrangements with other companies. And Ranbaxy does realise the limitations posed by manpower and money, says J.M. Khanna, President (R&D): ''That's why we have restricted ourselves to a few areas in research.'' That could also be why the company has chosen to license out its new molecules: its once-a-day innovative product, Ciprofloxacin, was licensed out to Bayer AG, giving the German company exclusive development rights and, for some world markets, marketing rights, in October, 1999. That would mean the onus of taking the drug to market rests with the licensee. But Ranbaxy is discovering that there can be another side to this. Bayer is also working on the development of a similar molecule developed by another company and indicates that it could launch either product. If the eventual choice happens to be the other's molecule, Ranbaxy will not get any more milestone payments: of the $65 million plus royalties transaction it has thus far received $15 million. The company is in talks with Bayer to sort out this issue. If there is a lesson in this entire episode it is probably about not rushing into selling a molecule, and, perhaps investing in further trials before doing so.

Finding The Right Answers

Ranbaxy has several options before it to raise money for investments related to research- and regulatory- spend. In 2000, the company's net cash inflow from operations, was a healthy Rs 296.7 crore and Brar sees them increasing now that the American operations have broken even. It could also leverage its low debt-equity ratio of 0.19 to raise capital from the market; and the licensing arrangements will bring in some money. Ranbaxy is also open to the DRL model of licensing out new molecules early on to an international pharma major, but Brar would prefer to think long and hard about that option: ''If it is a breakthrough molecule with a good chance of acceptance at the pre-clinical stage, it is licensable, but if a molecule is licensed out early, the gain in the future is that much lower''.

If all this isn't enough, Brar is willing to create a Special Purpose Vehicle, a company that will undertake large-scale clinical testing of potential bestsellers. In India alone, this market is projected to touch $2 billion by 2008. Besides Ranbaxy will also be able to sell stakes in the SPV to raise capital.

Ranbaxy's immediate problem, though, is to shore up its defenses in the domestic market. ''The company is vulnerable to competition from cheaper unbranded generics given the high share of antibiotics and nutritionals in its domestic revenues,'' says Sameer Baisiwala of JM Morgan Stanley. ''Ranbaxy forgot that international market competitiveness comes from the domestic market,'' says another Mumbai-based analyst.

Agrees Brar: ''We have under-performed the market in the last three months.'' This performance can be attributed to competition from regional companies like Mankind Pharma and Seagull Pharma (India has over 20,000 pharma companies, many with unusual names) that have used the price card to erode Ranbaxy's bread-and-butter businesses like anti-infectives. The company's response has been to try and reduce its dependence on anti-infectives by moving into other areas like chronic therapy (medication), offer some of its larger brands in newer forms through the drug delivery systems developed by its R&D efforts, and launch a rural marketing offensive. Going by the latest results, the efforts are bearing fruit. Ranbaxy's domestic sales grew 13.5 per cent in April-June this year, while operating profit before tax vaulted 88.6 per cent in the same period.

Despite Brar's denial, though, the company has seen the exit of several key senior executives. Sanjeev Chopra, the Managing Director of Ranbaxy's China ops left in June, 2000; Chief Information Officer Vasant Kumar in January, 2001; HR head Rajinder Sinh a fortnight later; and Sandip Sahni, the head of marketing in March, 2001. While the core team, operations man Brar and research brain Khanna are around, says a former employee, that shouldn't be too much of a problem.

Some analysts feel it is also time Ranbaxy started behaving like a global company. Reputed transnational pharma companies, they point out, don't go around getting their names tainted by allegations of stock market shenanigans the way Ranbaxy did courtesy its associate Vidyut Investments with alleged links to Ketan Parekh.

The most significant link in the company' ability to achieve its vision of going global is Brar himself. Comparisons to Parvinder Singh don't bother him. Nor does the constant speculation on when Malvinder will lay claim to his legacy. Along with his core team he is already working on a strategy for Ranbaxy post 2004. But that is still three long years away.

The Family Angle

MALVINDER & SHIVINDER: The grooming is underway When their father parvinder singh died in 1999, and the stewardship of Ranbaxy passed on to his trusted lieutenant D.S. Brar, the former's sons weren't really in the picture. With a combined stake of 32.1 per cent in the company, Malvinder Singh, now 29, and Shivinder Singh, 26, were touted as the unknown variables in an otherwise straightforward succession equation. Significantly, both stepped away from a budding controversy when they refused to be drawn into a 'succession-battle' around grandfather Bhai Mohan Singh's comments that the brothers needed to be on the board. The brothers themselves have had no problems working with DSB (that's what they call him) whom they describe as a ''close family confidante''. Fresh from the opening of the Rs 155 crore Fortis Heart Institute-of which the family owns 85 per cent-in Mohali, the duo speak of forays into four areas that will help them realise Parvinder Singh's overarching vision of going beyond pharmaceuticals. Thus, Ranbaxy will focus on pharma, Ranbaxy SRL on pathology, Fortis, on healthcare, and a potential JV with US-major Cigna, on health insurance. When the two brothers are together, Malvinder automatically takes the dominant role. During the meeting with this correspondent, for instance, it was he who answered most of the questions. The brothers Singh aren't on the board of Ranbaxy yet, but that could change soon says Malvinder: ''If the other shareholders and members of the board believe we are capable, then we will be on the board soon. We are working in that direction.'' For the record, both started their careers as management trainees. Today, Malvinder is the director in charge of global licensing, and Shivinder looks after Fortis. The two have no set timeframe for asserting their position at Ranbaxy, but Malvinder makes no bones about his ambitions: ''Five years from now I would certainly hope to be in a more senior position, playing a critical role in the core team, and through the team, providing leadership and direction to the company.'' The only variable in this pre-ordained succession exercise, then, will be when, not if. —Moinak Mitra

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