Ranbaxy stock plunges most in 10 mths, in tune with historical trend

With the sharp decline, Ranbaxy strengthened a historical trend and joined the ranks of several other global pharmaceutical giants such as Abbott Labs, Schering-Plough, Watson, Genzyme that have had to enter into a consent decree with the US government and faced a similar hammering of share prices.

?There are a lot of uncertainties built in Ranbaxy’s consent decree and a factor of exorbitant cost in hiring outside experts, fundamental changes that have to be incorporated in plants in the US and India, which are pulling the stock down. The ambiguities on what constitutes a lapse, which in turn can trigger huge financial penalties are also not helping Ranbaxy’s case,” said Ranjit Kapadia, senior vice-president, Centrum Broking. Many clauses in the consent decree will be open to interpretation and for the company it would translate into exercising extreme caution,?almost like walking on the edge of the sword?, another analyst from a foreign brokerage firm told FE.

One reason why consent decrees remains such a dreaded phrase in the pharma community is because of the way they have beaten the affected stock and wrecked investor sentiment. For Abbott, a consent decree in December 1999 resulted in its stock dipping close to 6% in the one and half months following the announcement while doubling trading volume. Schering-Plough?s agreement with the US Food and Drug Administration (FDA) in May 2002 caused an even sharper plunge of 18% in the share price in three weeks while Watson dropped by 10% on 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%. In Ranbaxy’s case, the trading volume on Friday on the BSE was over seven times the five-day average, more than five times the 10-day average and three times the-day average. While Credit Suisse in a report said that proposed settlement ?dispels any optimism?, Japan-based healthcare analyst Fumiyoshi Sakai said, ?We had expected the filing of this consent decree to show a way out of Ranbaxy?s difficulties and reopen its exports to the US, but the decree?s actual terms are more severe than we anticipated.?

An analysis of 17 consent decrees signed up by several pharma companies since 1989 by BNP Paribas shows that in 65% of cases, the pharma firms are yet to reach a resolution. Those which are yet to reach a closure include Eli Lily, Abbott Labs, Wyeth, Watson, GSK, Actavis, Sun Pharma-owned Caraco, Genzyme and Johnson & Johnson. Most companies that did manage to end their consent decrees, such as Schering-Plough and Warner Lambert, took anywhere between 5 and 12 years.

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 case studies show that the cost of a consent decree to a firm has proved to be much more than the penalty amount. For instance, for US firm Warner-Lambert (acquired by Pfizer in 2000), which shelled out a meagre $10 million by way of a 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 decade?s 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 the FDA imposed a $100-million fine on the company.