Ranbaxy Labs consent decree could engulf multiple facilities

Written by Soma Das | New Delhi | Updated: Dec 29 2011, 08:06am hrs
The apparent high cost of the consent decree Ranbaxy Laboratories signed with US Food and Drug Administration (FDA) may prove to be an exhaustive experience and entail more than just the amount of the penalty fee, which can run up to $500 million, if precedents are any indication.

While the finer details will be made public in a few weeks after it is approved by a district court in the US, the clauses in the consent decree may involve more than just putting the two tainted Indian facilities at Paonta Sahib and Dewas on high alert mode for a few years.

Ranbaxys agreement could transcend much beyond and encompass four US facilities and three facilities outside of the US (which could include Paonta Sahib and Dewas) and mandate the creation of a chief data reliability officer and data integrity expert, alongside deputing additional data quality auditors, if lawyers quoted in a US health policy publication are to be believed.

The consent decree includes Ranbaxy Labs, Ranbaxy, the senior vice-president, head of global quality, managing director, and regional director of Americas for Ranbaxy Labs, the niche publication cites a US attorney as saying.

In fact, the term comprehensive resolution that the company has preferred to use more often than consent decree in the last three years seems a misnomer, when the fate of other firms that have traversed a similar route is considered.

Of the 16 pharma companies that entered into consent decrees between 1993 and 2003, five had to be sold off. Even global giants such as Wyeth, GSK and Actavis have had to shut down some of their plants under consent decree. And traditionally, the cost of a consent decree to a firm has proved to be much more than the penalty amount.

Citing legal obligations, a Ranbaxy official refused to comment on the specifics of the agreement.

It is not clear till now whether Ranbaxys provisioning of $500 million matches only the penalty amount or includes a cushion to meet other costs that accompany such a decree.

For instance, for the US firm Warner-Lambert (acquired by Pfizer in 2000), which shelled out a meagre $10 million in fine, the total cost of decree (when losses accruing to product termination, delays in approvals and compliance cost of facilities and systems were factored in) in a decades time climbed over to $1 billion, according to a Fairleigh Dickinson University research paper calculation.

A similar case study for Abbott estimates that the cost of the consent decree had crossed $1 billion in five years following 1999, when FDA imposed a $100 million fine on the company. There are exceptions, however, such as the cases of Vintage Pharma and Schering Plough, which have actually managed to end their consent decrees.

Paying the financial penalty is one of the uncomplicated parts of a consent decree. Much more onerous clauses are built in as checks which drives up costs and headaches for a company. Usually a plant under decree must hire independent experts to certify labs of each facility. Retraining of all lab staff, hiring outside consultants to certify compliance of manufacturing processes with GMPs, submission of expert certification and compliance plans for correcting deficiencies, funding re-inspection of FDA are usual requirements in such an agreement, a regulatory head of another domestic firm said.

Why consent decree remains such a dreaded word in the pharma community is evident from how the announcement of these agreements have hammered the stock of these firms and wrecked investor sentiment.

For Abbott, consent decree in December 1999 resulted in stock dip of close to 6% in the one and half month following the announcement while doubling the normal trading volume. Scherings agreement with FDA in May of 2002 caused an even sharper plunge of 18% in the share price in three weeks while Watsons stock price dropped by 10% upon announcement of the agreement on March 28, 2002.

This when the trading volume for these stocks jumped up to five times the normal volume. For Genzyme on March 24, 2010, when the news broke, the stock slid by 6%. According to a brokerage firm analyst, institutional investors a few mutual funds and hedge funds are already slashing their exposure to the Ranbaxy stock. The company scrip has remained volatile since the announcement and between December 22 and December 28, slipped by 2.6%.

Analysis of past consent decrees by a brokerage firm shows that time taken to reach average resolution is nearly seven years for all pharma firms and four years for generic companies. According to industry estimates, only 2% of companies which entered consent decrees with FDA came out of it.

Many questions need to be answered before we decide whether decree is reasonably favourable for Ranbaxy whether the decree requires the company to stop selling one or more of its products for a specified duration, whether it mandates sharing of profits for products sold while the decree lasts (for instance both Genzyme and Schering-Plough paid 18.5% and 24.6% of product-specific revenue), whether the decree imposes any financial penalty for missed deadlines or other non-compliance, usually pegged at $15,000 odd per day, a pharma lawyer asked. Much clarity would emerge once Ranbaxy announces terms of agreement after the district court of Maryland approves it.