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By Katherine Eban, contributor May 6, 2011: 1:02 PM ET
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The war over Lipitor - Fullversion
FORTUNE -- Just after Thanksgiving this year, if all goes as planned, thepharmaceutical industry will pass a historic milestone: A generic version ofLipitor -- the biggest-selling prescription drug on the face of the earth -- willgo on sale for the first time in the U.S.
You'd think that in this era of generic-drug dominance, making thetransition to a nonbranded version of Pfizer's vaunted cholesterol-fightingstatin would be smooth, or at least controlled. And indeed, that's preciselyhow it seemed -- until just a few months ago. Now the process appears tohave unraveled, leaving serious questions about who will make thecheaper form of Lipitor, whether the price will really drop, and mostdisturbing of all, whether patients will be able to trust that the medication issafe.
As of today, Ranbaxy, India's largestpharma company and the 12th-largest generics maker in the world,is expected to launch genericatorvastatin calcium, as themolecule is formally known, in theU.S. market on Nov. 30. Underfederal rules, Ranbaxy would enjoysix (very profitable) months in whichit would have the exclusive right to
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sell it.
The problem: The Food and DrugAdministration has accusedRanbaxy of "a pattern of systemicfraudulent conduct" over a period ofyears. According to the federalagency, Ranbaxy fabricated data indrug applications, took shortcuts incrucial quality tests, and violated araft of additional manufacturingstandards. So widespread and gravewas the misbehavior that in 2008 theFDA barred Ranbaxy from importing30 different drug products into theU.S. That ban remains in placetoday. Meanwhile, federalprosecutors have been negotiating acriminal and civil settlement with thecompany that could lead to fines andpayments exceeding $1 billion,Fortune has learned from sourceswith knowledge of the negotiations.
Ranbaxy declined to comment forthis article, as did the FDA. But incourt filings and financial
statements, the company, whose leading products in the U.S. are genericversions of Valtrex (for herpes), Aricept (an Alzheimer's drug), and Zocor(another cholesterol medication), has denied misconduct and asserted thatit has cooperated fully with the government.
The result of the uncertainty about Ranbaxy and Lipitor has been marketmayhem. Generic-drug companies are now feuding like greedy relatives atLipitor's graveside as they wait to see whether Ranbaxy will maintain itsstatus as front-runner. In March, Mylan (MYL, Fortune 500), one of theseven generic-drug makers hoping to sell Lipitor, sued the FDA, allegingthat the agency's "indecision" and delay had made planning all butimpossible.
A group of five U.S. senators has appealed to the FDA for clarity. In earlyMarch they wrote to the agency's commissioner, demanding timelyinformation on who will be making generic Lipitor and when. The FDA, forits part, has made no public statements on Lipitor's fate. It has yet toformally approve or deny Ranbaxy's application to sell the generic.
The Lipitor stalemate is the culmination of the twisting saga of Ranbaxy,which continues to prepare for its product debut, despite the uncertainty asto whether it will occur. "For Ranbaxy, this is the fight of their lives," says alawyer for a pharma company. "This is the biggest generic opportunity inhistory. None of us know where this is going to come out."
The battle begins
In the U.S., deciding which company gets to make the first generic versionof a drug is a complex process that combines private litigation andgovernment regulation. It's governed by the federal Hatch-Waxman Act.That law, which dates to 1984, created a pathway, the Abbreviated NewDrug Application, for companies that want to sell a generic version of aparticular medication.
Known by its acronym, the ANDA requires two simultaneous steps for anycompany that wants to be the first to sell a generic. That company mustchallenge the brand-name company in court and demonstrate that thevarious patents covering the original drug have run their course or areotherwise not valid. At the same time, the applicant must undergo a formal
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FDA review to see whether the proposed generic is the biologicalequivalent of the original and will achieve a similar level of concentration inthe blood. The FDA also has to ascertain that the generics company iscapable of manufacturing the medication in commercial quantities.
The reward for winning this arduous two-front war is six months ofexclusive rights to sell the generic. During that period the winner willtypically charge 70% to 80% of the brand-name price. After that,competitors are permitted to jump in, and the price usually drops to about5% of the original drug's.
For generics manufacturers, being first can be the difference betweenmaking a fortune and making a living. (Indeed, six months of exclusiverights to atorvastatin will generate about $600 million in profits forRanbaxy, according to analyst projections. This for a company with $1.9billion in revenue and $459 million in earnings in 2010.) Getting first-to-filestatus has become so important that generic-drug executives have actuallybeen known to sleep overnight in their cars in the FDA parking lot to makesure they're the first to file the paperwork.
So it went with Ranbaxy in a process that stretches back all the way to2003 -- a time when the company was little known in the U.S. and anythingbut an obvious choice as the first to take on a blockbuster. That yearRanbaxy scientists reported they had developed a generic version ofatorvastatin. The next day a company official flew from New Delhi toWashington to file an application with the FDA, as journalist BhupeshBhandari recounts in the book The Ranbaxy Story. That made Ranbaxythe first to file, with FDA front-runner status.
Though Wall Street analysts were dismissive at first, Ranbaxy's proposedformulation seemed credible. The company moved aggressively, and itslegal maneuvering was deft. It embarked on litigation with a much biggeropponent, Pfizer (PFE, Fortune 500), that would span the next five years.
In June 2008 the companies announced a deal: Pfizer would no longerblock Ranbaxy's efforts to sell generic Lipitor in the U.S., as long asRanbaxy deferred its launch of atorvastatin until Nov. 30, 2011. Thetimetable extended Pfizer's patent by at least five months. But even thissettlement, viewed as definitive at the time, did not resolve the matter.Ranbaxy still needed a green light from the FDA.
As this was happening, Pfizer made plans to manufacture its own genericLipitor, to be distributed by Watson Pharmaceuticals, even as it continuesto sell the name-brand version itself. Increasingly, brand-name companiesare doing this. Once a drug goes generic, "the brand goes down the tubesin a hurry," says the pharma lawyer. Launching a generic, he says, is a"mitigation strategy."
Pfizer's generic could become the beneficiary of Ranbaxy's woes. If theFDA were to block or delay Ranbaxy's generic Lipitor, the Pfizer genericcould have the field to itself. It "could negatively impact pricing" forconsumers, says Randall Stanicky, a health-care and pharma analyst atGoldman Sachs. Pfizer could sell its generic at the highest possible price,and since Ranbaxy had been the first to apply to the FDA, no othercompetitor could sell it. That leaves Lipitor users in the odd position ofrooting for Ranbaxy, a company with some unsavory history.
Accustations blow up
In August 2005, a whistle blower at Ranbaxy contacted the FDA, allegingthat the company had committed extensive fraud in its generic-drugapplications. The whistleblower's claims raised serious questions about theintegrity of Ranbaxy's manufacturing and the safety of its drugs.
The ensuing four-year investigation, in which the FDA has teamed with the
U.S. Department of Justice, turned up disturbing evidence, according togovernment filings (though none of the resulting allegations related toLipitor). Crucial tests to evaluate how quickly drugs degrade, meant to beconducted over a months-long period, were actually performed over just afew days, with the records falsified to conceal that. On certain days qualityassurance supervisors who purported to be on-site were absent, and theirsignatures were falsified. In yet another lapse -- this one potentially life-threatening -- Ranbaxy risked cross-contamination of penicillin with otherdrug products by manufacturing them in close proximity. Taken together,these and other forms of deception by Ranbaxy raised the possibility thatwhat the FDA had approved and what patients were ingesting were twodifferent things.
FDA inspectors were disturbed by what they found at the company'sPaonta Sahib factory in India, where it planned to make generic Lipitor.They were "clearly shocked" that Ranbaxy was "totally flouting the rules,"says one congressional investigator who later interviewed the inspectors.
By September 2008 the FDA had issued warning letters to Ranbaxy,describing what it referred to as "significant deficiencies" at Paonta Sahiband Dewas, the company's two biggest Indian plants. The FDA restrictedthe company from bringing some 30 drug products from those plants intothe U.S. market. It was a severe blow, and Ranbaxy began intensiveefforts to reverse the FDA's decision. Even as the agency blockedRanbaxy from importing the drugs, it did nothing to remove existing stocksof those same medications from U.S. stores, and it permitted the companyto sell another 50 drugs that were manufactured at other facilities. Thosedecisions helped provoke an unusual twist: a congressional investigation ofthe FDA (which fizzled out after a change in legislative leaders).
In February 2009 the FDA took another drastic step: It shut down reviewsof all pending or future drug applications from the Paonta Sahib plant,effectively choking off the company's main pipeline into the U.S. market.The FDA imposes the restriction, known as an Application Integrity Policy,in cases where it has confirmed fraudulent activity.
Suddenly Ranbaxy's generic-Lipitor application, which relied on PaontaSahib as the manufacturing site, seemed to be on very shaky ground.Ranbaxy appealed to the FDA for permission to shift the manufacturinglocation for atorvastatin to its U.S. plant in New Jersey. Since then,Ranbaxy's negotiations with the FDA and the Department of Justice havereceded from public view, and the FDA has not yet issued an opinion as towhether it will permit Ranbaxy to make atorvastatin in the U.S.
Just before Ranbaxy's regulatory problems burst into public view, in June2008, Daiichi Sankyo, Japan's third-largest drugmaker, purchased amajority share of the company. Ranbaxy had just won the rights to Lipitor.But within months Japanese executives were stunned to learn the depthand extent of Ranbaxy's woes, according to sources with knowledge of theFDA investigation. Daiichi Sankyo spent $4.6 billion for 63% of Ranbaxy --and a year later wrote down the value of the acquisition by $3.6 billion.
A spokesperson for Daiichi Sankyo would say only, "The first-to-file statusfor atorvastatin was one of many reasons that Ranbaxy was an attractiveacquisition for Daiichi Sankyo. However, our standing policy is not tocomment on ongoing litigation. We continue to cooperate fully with the FDAto resolve the issues impacting Ranbaxy operations, but we will notspeculate on the timing of any resolution or discuss any detail of thosediscussions."
No resolution in sight
The possible outcomes to the generic-Lipitor mess seem endless. WallStreet analysts map out complex flow charts to rehearse the potentialscenarios and their market impact. Will the FDA allow Ranbaxy to launchatorvastatin in November? Might Ranbaxy cede its rights to the drug so
that it can seal a deal -- or do just the opposite and cling to the rights as abargaining chip? Can Ranbaxy defer its exclusivity period, thereby causinga pileup of generics companies forced to wait until Ranbaxy uses up its180-day window? Such deferrals were permitted when Ranbaxy filed itsapplication back in 2003, but the law has since changed to a use-it-or-lose-it provision. Because of the Lipitor market's sheer size, the differingscenarios could have repercussions across the entire pharmaceuticalindustry, from pharmacy benefit management companies to wholesaledistributors to drugstore chains to, of course, patients.
Meanwhile, Ranbaxy's negotiations to resolve the federal fraud allegations,now three years long, drag on with no end in sight. Among the obstacles:The FDA is insisting on a meaningful settlement, and Ranbaxy isdesperate to retain its rights to Lipitor. As this has occurred, Daiichi Sankyohas ushered two Ranbaxy CEOs to the exit and predicted an imminentresolution to the crisis.
The pressure on Ranbaxy is increasing, and Fortune has learned that inMarch it scheduled, then postponed, a meeting with the feds to resolve thefraud case. Some legislators seem to be growing impatient with the FDA.On March 10 the group of five U.S. senators seeking clarity from the FDAwrote to commissioner Margaret Hamburg, urging her to resolve"outstanding regulatory issues that may delay entry of generic versions ofthis medication." The letter focused on the costs to the government andconsumers. Introducing generic Lipitor could save the public up to $6.7billion a year, the letter states. The senators asked for a response in aweek. So far they've received goodwill phone calls but no formal reply.
Soon after the senators' letter, on March 21, Mylan, a generic-drug makerwith headquarters in West Virginia, filed a lawsuit against the FDA infederal court in Washington, D.C. The company alleges that the FDA'sfoot-dragging has hampered its efforts to plan its own generic-Lipitorlaunch. "FDA's indecision is permitting Ranbaxy to maintain a benefit towhich it otherwise is not entitled," the complaint charges, requesting thatthe FDA deny Ranbaxy the exclusive rights to generic Lipitor.
The FDA responded on April 4 with a hard-hitting motion to dismissMylan's suit. The agency defended its silence, arguing that it is under noobligation to disclose confidential deliberations or to help Mylan with itsbusiness planning. Furthermore, the FDA noted that it was unclearwhether the FDA would even approve Mylan's application to sell thegeneric. On May 2, a judge dismissed Mylan's suit, ruling that it can'tintervene in another company's application.
Investors interpreted the FDA's stance in the Mylan case as a hint that theagency was planning to allow Ranbaxy to sell atorvastatin in November.The Indian company's shares rose on the news. It may indeed turn out thatway, but with Ranbaxy still trying to hammer out its giant settlement, theonly certainty is that there will be a few more twists and turns along theway.
--Katherine Eban, a Fortune contributor, has also written for Vanity Fair,the New York Times, and Self magazine. Her most recent article forFortune was "Drug Theft Goes Big," in the April 11, 2011, issue.
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