Orchid Chemicals & Pharmaceuticals Ltd (Orchid)is one of the largest manufacturers of the cephalosporin antibiotics globally. In domestic market, Orchid plans to diversify into other antibiotics like macrolides and other therapeutic groups like anti-ulcerants, anti-virals and cardiovasculars. In an interview with India Infoline, Mr. Kailasam Raghavendra Rao ? the Managing Director, shared his views on the current performance of the company and future plans in detail. Mr Kailasam Raghavendra Rao promoted Orchid in 1992 as 100% export oriented unit for manufacture of Cephalosporin antibiotic and rapidly increased capacity from single product to multi product facility from 90tons in FY93 to 650tons in FY99. From 1988 to 1992 he had a successful stint in pharmaceutical sector with Al Buraimi Group based in Sultanate of Oman.
He was responsible of conception and commissioning of a 300 tons antibiotic manufacturing plant in record time of 9 months. Mr Rao is a graduate in commerce and has done management from IIM Ahmedabad in 1979. He started his illustrious career with Pure Ice Creams Ltd, Bombay. In 1981 he joined Ashok Leyland, Madras as Assistant Manager ? Corporate Finance and worked till 1986. Later he joined Standard Medical and Pharmaceuticals Ltd as Vice President, which paved the way for next job at Muscat in 1988.
Sir, can you please comment on your Q1 FY2000 performance ? And the near term outlook. What will drive Orchid?s profitability ?
There has been a growth of more than 30 per cent on the top line on a corresponding basis. The gross operating margins have improved. But what has weighed down the net profit has been the interest costs and depreciation, which should get corrected as we go along because the future expansions are going to be based on low-cost or no-cost kind of funding. Ours is a 25 to 30 per cent year on year growth oriented company, which should continue not only for this year but also for the next 3 to 4 years. We should be able to achieve a similar growth in bottom lines as well through a judicious product mix and expenditure control.
Bulk drug prices, specifically for cephalosporins have been very volatile worldwide and have witnessed downtrend in the last couple of years. What are Orchid?s plans to limit its exposure to bulk drugs?
We have done a reasonable amount of justice to our cephalosporin products over the last five years. But I don?t think we can continue for another five years. We can?t be increasing the cephalosporin capacity in big volumes in the future. We will alter the product mix in the cephalosporin range. But we will also get into non-cephalosporin products as our priority area. And in addition to non-cephalosporin products we will also be concentrating on research. We are looking at macrolides, anti-ulcer and anti-viral products. We are also looking at life style drugs.
You had mentioned earlier about getting into long term contracts with multinational pharmaceutical companies for bulk drugs. How far have you moved in this direction ?
That?s going to be our next focus. We have to get into the regulated markets soon. So far we have been building volumes and increasing our markets in `not so developed ? kind of countries. But we have to get into the American market. So we are discussing with some of the US companies for long term supply contract for a period of say, over 10 years so that we can cater to those requirements and also get a foothold into those regulated markets. The structure will be nothing but a supplier-customer relationship. We will identify some products and work with these generic companies very closely in terms of supplying for their requirements. That will also give them an opportunity to work with us in the future. As and when these products become off-patent they would be the first to hit the market because India and in particular Orchid is in a unique position to manufacturer certain products which are patented at the moment but will be off-patent by 2005. Thus we will enter into the American market as soon as the product patents expire.
Can you further elaborate on the cost structure in such a kind of relationship between the Orchid and the generic companies in America?
Cost is a factor, which is relevant to Orchid only. It is not a major factor for the customers because they are looking at opportunities to develop their own molecules for them to be present in the market as soon as the product becomes off- patent. So it is not a question of cost structure, which is an internal kind of a figure. But what is an opportunity for the generic company could be to tie-up with Orchid so that they can continue to produce molecules, which would become off- patent and be the first one to hit the market. But of course to change from the present supplier we will have to give the some kind of a price incentive, which we can do because we have cost advantage.
R&D activity is going to be the focus area of Orchid in the future. Could you please explain in detail about the Orchid?s plan for R&D ? Will SPIL concentrate on research (identification of new molecule only), novel drug delivery systems (NDDS), chiral synthesis or recombinant biotechnology ?
We have already developed couple of products like polymer based cephalosporin adduct along with IPPA of Italy. We will keep on improving such drug delivery systems because it is no longer restricted to only basic research of new molecules. But also in existing molecules - how to modify them and make it equally bio-available with lesser dosage on different kind of disbursal mechanisms are what are catching up. In that I think Orchid can play an important role. In the past only scientists used to physically work on new molecules. The field is evolving much faster today. A lot of chiral research, molecular biological research and computer technology are available at the moment. So from DNA structure onwards we can develop many kind of molecular combinations and then at some stage we can either branch off that combination and sell it to an MNC or work with them together in terms of furthering these ideas into a commercially viable entity.
When do you see this new polymer-based product fetching revenues for Orchid?
We will jointly apply for patent for the new molecule. Right now it is in a preliminary stage. Now we will have to conduct clinical tests. So it could be more than nine months before any commercial realization can happen from this development.
Will the contract manufacturing tie-ups also be extended to do joint R&D? Will you have separate subsidiaries doing these functions?
When we develop a relationship with some company it is not exactly contract manufacturing that we are looking at ?it is identifying certain molecules for production and to supply to them in terms of their formulations and product development. Obviously when they have ideas of what products to come out in the market they can also share these ideas with us and we can develop new processes for these molecules and try and satisfy the customer requirements.
We will have divisions for accounting and administration purposes. But everything will be done only in Orchid and Orchid will do nothing other than pharmaceuticals. So it will be a composite structure within Orchid Pharma itself.
What are your plans for the domestic formulations market ?
This is again an important area for us. Because in the first five years of Orchid?s history, we have added markets and volumes. This kind of an increase or growth cannot go on forever. So we have to shift our focus onto non-cephalosporin and other antibiotics. And also work with MNC?s for long-term supply contract. In addition to the research the third thing we will do is to develop brands for the local market. Then on a non-conflicting basis we will also be marketing these formulations in the international market as well. We are looking at macrolides, anti-ulcer and anti-viral products. We are also looking at life style drugs.
How you propose to fund all these plans? You have talked about making inroads into the US market. When do you see Orchid going in for an ADR issue ?
We have identified that the method of funding will be through private placement of equity and not by way of loans or waiting for internal generation to take place. Talks are on with a couple of foreign private equity funds for this.
If you see the history of Orchid, initially we raised equity and placed the shares privately with FIIs and Mutual Funds. The next expansion we did through borrowings because we had reserve borrowing capacity built up in the first 2 years. Now the third level is again going to be done through private placement. We are keeping all options open for the next stage. We would not like to raise money from the American market just for the sake of it because we would like to have a presence in the US market, work with US companies. We need to have our own presence felt through our products, either directly or indirectly. At that time all options will be open.