Ranbaxy Laboratories

The latest to claim fraud at generic Lipitor maker Ranbaxy: Its owners

May 23, 2013: 10:21 AM ET

Japanese drugmaker Daiichi Sankyo has quietly stood by its decision to purchase Ranbaxy in 2008. Now, though, the company is publicly suggesting it was defrauded in the $4.6 billion acquisition.

By Katherine Eban

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FORTUNE -- For Indian generic-drug manufacturer Ranbaxy, the past five years have consisted of an escalating series of regulatory and legal woes. First the Food and Drug Administration banned the importation of pharmaceuticals from two of Ranbaxy's Indian plants. Then the U.S. Department of Justice slapped the company with a wide-ranging consent decree, citing the company's quality deficiencies. Then, in late 2012, Ranbaxy was forced to recall millions of pills of its generic Lipitor after glass particles were discovered in some of them. Finally, on May 13, the company pleaded guilty to seven federal criminal counts of selling adulterated drugs and making false statements to the U.S. government.

Through it all, its majority owner, giant Japanese drugmaker Daiichi Sankyo, has quietly stood by its decision to purchase Ranbaxy. Now, though, Daiichi Sankyo is taking a strikingly different stance, publicly suggesting it was defrauded in the $4.6 billion purchase in 2008.

In a press release on Wednesday, Daiichi Sankyo stated that it "believes that certain former shareholders of Ranbaxy concealed and misrepresented critical information concerning the U.S. DOJ and FDA investigations. Daiichi Sankyo is currently pursuing its available legal remedies and cannot comment further on the subject at this time."

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The statement did not identify which shareholders Daiichi Sankyo might pursue. But it suggests the Japanese company might take legal action against Malvinder Singh, an Indian billionaire who was CEO of Ranbaxy in 2008 when he and his brother sold their 34% share in the company for $2 billion. Daiichi Sankyo bought another 30% via purchases from the company and a public tender offer. (The remaining shares continue to trade publicly.)

Daiichi Sankyo's press release comes in the wake not only of Ranbaxy's highly unusual criminal guilty plea and $500 million in fines and penalties -- the largest ever against a generic-drug maker -- but also a lengthy Fortune article that exposed for the first time the depth and extent of the fraud charges leveled at the company and the knowledge of senior company executives.

While the criminal case focused on sales in the U.S. market, Fortune's article last week exposed for the first time multiple accounts from current and former company insiders, backed by internal documents, showing how Ranbaxy committed systemic fraud in its worldwide regulatory filings. The article described how an internal investigation conducted by a company executive, Dinesh Thakur, who went on to become a whistleblower, reported appalling deceit: Ranbaxy scientists substituted cheaper, lower-quality ingredients in place of better ingredients, manipulated test parameters, and even bought brand-name drugs and used them in place of their own generics to win FDA approval.

Thakur's investigation culminated with a presentation to a subcommittee of the Board of Directors by Thakur's boss Dr. Rajinder Kumar in late 2004. In a PowerPoint presentation, Kumar informed the board and the company's then-CEO, Brian Tempest, that Ranbaxy had lied to regulators and falsified data for more than "200 products in more than 40 countries." The PowerPoint noted that "elements of data [were] fabricated to support business needs," meaning that the company had submitted false data in order to win approval from drug regulators.

No market or type of drug was exempt, including medications purchased by the U.S. and World Health Organization as part of a program to fight HIV in Africa. In Europe, the presentation showed, the company used ingredients from unapproved sources, invented shelf-life data, and tested different formulations of the drug than the ones it sold. The PowerPoint also reported that in certain markets -- including Brazil, Kenya, Ethiopia, Uganda, Egypt, Myanmar, Thailand, Vietnam, Peru, and the Dominican Republic -- the company had simply invented all of its testing data.

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One question posed by Fortune's article was whether Daiichi Sankyo knew the extent and depth of any fraud and the extent of Ranbaxy's problems with the FDA. In a 2010 interview with Fortune, Tsutomo Une, Daiichi Sankyo's head of global strategy, said, "I never thought that we were fooled." With its statement on Wednesday, Daiichi Sankyo appears to be saying it was, indeed, hoodwinked.

Daiichi Sankyo declined to comment. Ranbaxy and Malvinder Singh did not respond to requests for comment for this story. However, in previous comments to Fortune, a spokesman for Singh defended his conduct. In its Wednesday press release, Daiichi Sankyo stressed Ranbaxy's "improved business standards and quality assurance initiatives." As part of the same press release, Ranbaxy CEO Arun Sawhney stated, "Ranbaxy is a different company today. The steps we have taken over the recent years reflect the wide-ranging efforts of the current board and management to address certain conduct of the past and ensure that Ranbaxy moves forward with integrity and professionalism in everything we do." The statement added that the company has invested more than $300 million to upgrade its manufacturing facilities, instituted a new code of conduct for all Ranbaxy employees, and completely reconstituted its board of directors and executive team.

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