By Ruma Dubey

We woke up to the news that Ranbaxy has pleaded guilty , accepting the felony charges and it has also agreed to pay a criminal fine and forfeiture totaling $150 million and to settle civil claims under the False Claims Act and related state laws for $350 million. A whopping $500 million and not to mention the loss of face.

In the Press Release issued by the US Justice Department, it has stated, "In the largest drug safety settlement to date with a generic drug manufacturer, Ranbaxy USA Inc, a subsidiary of Indian generic pharmaceutical manufacturer Ranbaxy Laboratories Ltd, pleaded guilty today to felony charges relating to the manufacture of certain adulterated drugs at two of Ranbaxy's facilities in India and their distribution.”

Well, the stock price is up over 3% currently, with more buyers than sellers on the counter. Does this mean that the market does not care about this ruling? It surely does but for the market, more than the felony charges or the loss of reputation, the fact that the company has already provided for the $500 million and this might not have any material impact now is what matters. It was happy that the case which was going for over a year has finally come to an end; so what if Ranbaxy was selling adulterated drugs?  This is a huge issue of corporate governance, one of the worst cases ever all the marekt cares for is the $500 million provision.

This attitude of the market is puzzling or rather a reflection of how we all think today. The material impact is all that matters but what about the fact that the company, an Indian company at that, has accepted that it manufactured adulterated drugs in USA? Isn’t that a big shame? The company has stated that this happened before Daiichi Sankyo was in the picture, under the old management. But that does not mean that because Ranbaxy is today under a Japanese management, it will suddenly get viewed differently.

In India, adulterated drug is common news; it happens all the time. But the developed countries, especially USA do not view it as common news; it is a serious crime. Yes, under Daiichi, the company will turn into a new leaf but the blotch left on Indian pharma companies will be hard to erase. As such India is viewed as an extremely corrupt nation and such cases just go on to reiterate this fact further. Henceforth Ranbaxy getting back to business in full swing and US FDA gaining full faith will be thanks to the Japanese management. But Indian pharma companies will probably face more scrutiny that before.

The acceptance of a guilty charge by Ranbaxy will now mean that the company will have to work harder to establish its new brand name, maybe move to ';Daichi' and blot out the name of Ranbaxy completely. The new management will have to work on bettering its relation with the US FDA and try and gain back the trust.

Its exclusive six month agreement to sell the generic version of Lipitor ended  in May 2012. Then in Nov’12 it voluntarily recalled Lipitor from the US markets as some glass particles were found in the drug in some select batches. Post this recall, its market share of Lipitor fell from 42.1% to 2%. It was only in Feb’13 that it resumed supply of the Lipitor generic from Ohm Laboratories to the US. All this has hit the company pretty hard on the financial front. For quarter ended 31^st March 2013, the company posted a 90% (YoY) decline in net profit at Rs.126 crore. This can be blamed on the ‘base effect’ as last year in March the company was selling Lipitor exclusively. Its operating margins continue to remain a cause for worry – it came in at 6% in March quarter and for 2012, it was at 9.4%. Compared to its peers, it is trailing at much lower levels – Sun Pharma has an OPM of around 39%, Cipla is at 27% and Lupin at 22%. Clearly, Ranbaxy has a lot of catching up to do.

So would you buy the stock now? Makes no sense as there will be a few more quarters of pain.

And more importantly, will you buy drugs made by Ranbaxy? There is a tremendous loss of trust and that will take more time to repair than the operating margins.