Aiming high

Orchid Pharma is betting big on the regulated markets. Will its gamble pay off?

K Raghavendra Rao

It's a huge risk to take. With numerous drugs going off patent by 2005, most pharmaceutical companies are diversifying into varied therapeutic areas to ensure growth. But Chennai-based Orchid Chemicals and Pharmaceuticals is laying all its bets on the antibiotic and anti-infective cephalosporin genre.

It now wants to enter the regulated market over the next four years. And the Rs 713 crore Orchid, which was into cephalosporin bulk drugs, now wants a larger pie of the regulated market.

For this, it is investing $100 billion (Rs 450 crore) to establish global marketing tie-ups, enter new geographies, and in some cases, also enter into new segments like lifestyle drugs. By then, it hopes to double turnover.

Will Orchid's gamble pay off? "It is drawing on its core competency, which is good. But at the same time, it is putting all its eggs in one basket," says a pharma analyst.

As the only pharmaceutical company in the country straddling the entire range of cephalosporins, targetting the regulated markets is a logical step for Orchid.

Set up in 1992, it spent its first five years growing its product basket to 25 cephalosporin molecules and spreading its reach to 75 less-regulated markets including China, Asia Pacific, Russia and middle East.

Today, the global market for cephalosporins is estimated at $10 billion with the regulated markets accounting for 70 per cent. According to K Raghavendra Rao, managing director Orchid, the strategy is two pronged. While it helps Orchid penetrate new territories, it also improves the product margins.

Says Rao, "Our margins in the the unregulated market are around 21 per cent compared to almost 30 per cent in the regulated arena."

It has identified 15 products to push into the established western markets. In the run-up, last year, it got the US Food and Drug Administration (US FDA) to approve its bulk facility at Chennai.

Orchid has filed seven abbreviated new drug applications (ANDAs) and eight drug master files (DMFs). It plans to complete the ANDA filings for all the 15 products by the close of the current financial year.

So far, only two of its DMFs have been approved. Until two months ago, the company had filed patent applications for 141 processes, 37 new chemicals entities, 26 formulations and one biotechnology. Of these 205 applications, 75 have been published, of which nine patents have been granted.

With the US as the biggest consumer of cephalosporins, constituting 30 per cent of the global market, Orchid has kicked off its marketing initiatives there. Orchid's cephalosporins come in both injectible and oral form.

It has tied up with $1.2 billion Apotex Corp for marketing the eight injectable antibiotics identified for regulated markets.

For oral cephalosporins, it has tied up with the $660 million Par Pharmaceuticals, the principal subsidiary of Pharmaceutical Resources Inc.

But Orchid's strategy is different from other Indian players like Sun Pharma, Lupin and Ranbaxy.

For instance, Ranbaxy is marketing its formulations under its own brand name. But since setting up a marketing network requires deep pockets, Orchid has chosen to play the supplier to its US partners.

"We believe our expertise lies in research and development, manufacture, intellectual property rights (IPR) filings and getting regulatory clearances. We prefer to invest our resources in these activities, rather than marketing," explains Rao.

Even so, its biggest business is still active pharmaceutical ingredients (APIs) or bulk drugs.

Last fiscal, APIs accounted for 84 per cent of the company's turnover. Of this cephalosporins accounted for 93 per cent and exports account for 86 per cent.

At the same time, its formulations business has been moving up but at Rs 103 crore, its share in the company's total sales is only 15 per cent. What's more, overall forumulations are a mere 5 per cent of Orchid's total exports currently.

But its business mix is up for change with its entry into the regulated markets.

"APIs have driven our business so far. But the past two years have seen us put in place adequate infrastructure for growing our formulations business as well," says Rao.

The company currently has three formulations plants. One is for non-cephalosporin products, the second for cephalosporins and the third dedicated to the generics market.

With all this in place, Rao claims that exports will be up to 90 per cent by 2008-09. And the big push will come from the formulations flow into the regulated market which will also constitute half its turnover by then.

But competitors and pharma analysts are skeptical. They say that Orchid's cephalosporins presence is only in APIs and not formulations. "That is not true. We have the capability to transform all our APIs to formulations, be it oral or sterile. In fact we are covering all four generations in our formulations' exports spread over different less regulated markets," points out Rao.

Analysts say that prices crash everytime the drug goes off patent. But Rao say he will not be unduly affected.

"That is true in segments where there are 15 to 20 players. In the categories we are targetting, there will be just one to four players. Some of them are life saving drugs. We do not see the prices dipping as much in these segments," adds C B Rao, deputy managing director.

According to D G Shah, secretary general, Indian Pharmaceutical Association (IPA), even if prices in the US fall by 10 per cent, they are still higher than domestic prices.

"Injectables, for example, do not see as much price erosion as tablets," he says.

One big product Orchid is targetting next year is cefriaxone. But players are already entrenched. Like Takeda of Japan has the first-mover advantage and Lupin Pharma has also managed to get an ANDA approval for the segment.

"Now they have to by-pass both these filings, for clearance," says a competitor. Rao claims that these are non-issues as there are different processes to the same product.

There is still a lot to be done. Even as Orchid has sewn up its marketing network in the US, it is yet to crystallise in Europe. "Europe is a fragmented market. Products will not go off patent there in all the countries simultaneously. We will require country-specific strategies. But we also see some players with presence spread over key markets like UK, Germany, France and Italy," says Rao.

Orchid is also making forays into Japan. It has started exporting advanced intermediates as a precursor to exporting APIs.

So far so good. But there are challenges galore. Already, everybody is getting aggressive on cephalosporins. Lupin, Ranbaxy and Glaxo are operating in this sphere. At the middle level there is Aurobindo Pharma and Wockhardt.

And Lupin already has an US FDA certified plant in place. Orchid officials say they are not worried. "The products we are targetting will go off-patent only from next year. Our plant should be certified this year," they say.

Also, making matters worse, Orchid has a high debt "" around Rs 770 crore "" on its books and may need to raise more money to fund its expansion into regulated markets. "This is a cause for concern," say analysts.

However, Shah points out to Orchid's cephalosporins specialisation. "No one else has facilities on par with Orchid when it comes to cephalosporin manufacture in this country," he says.

Orchid is also trying its hand at other segments like lifestyle drugs. These include drugs for central nervous systems (CNS), cardio-vascular ailments (CVS) and anti-diabetic.

Sure, this will give Orchid more room in the regulated market. But it remains to be seen whether it can capitalise.