After two lacklustre years, the Chennai-based Orchid Chemicals and Pharmaceuticals turned in an improved performance in the fourth quarter last fiscal.
Its revenues for the fourth quarter ended March 31, 2003, stood at Rs 194.96 crore as against Rs 147.18 crore for the corresponding period the previous year. Net profit was Rs 10.32 crore compared to a net loss of Rs 4.12 crore. Additional capacities generated by new bulk actives projects and changes in product mix led to the improvement.
In the past two years the company made significant investments in R&D, formulations and its international business. To boost revenues from its formulations business, it acquired the Chennai-based Mano Pharma in January this year.
Raghavendra Rao, managing director, Orchid Chemicals and Pharmaceuticals, spoke on the company's foray into regulated markets, its drug discovery programme and future plans.
You have received FDA approval for Cep-halexin. What strategy will you adopt for your foray into regulated markets?
We have a two-pronged strategy for generic markets. For products that have already gone off-patent, we will tie up with an existing generic manufacturer and supply bulk actives for the formulations.
For products that are likely to go off-patent in the next 2-3 years, we will manufacture both bulk actives and dosage forms and tie up with a distributor who will market our products. We don't plan to establish our sales network at the moment.
We believe in playing to our strengths such as R&D skills, innovative process and manufacturing skills, and leveraging on the local knowledge, distribution and regulatory skills of our partner.
This is the model we are going to follow at least for the next two years. The first shipment of Cephalexin will be out by the middle of this month. Our formulations plant for regulated markets will be operational by June. We have set ourselves a target of filing 10-12 drug master files for which corresponding ANDAs will be also be filed.
What about your manufacturing joint venture in China? When will revenues from it start accruing?
The manufacturing joint venture in China has two parts. Phase one will be operational by July and the second phase will be operational by October.
So the second half of the current fiscal should start reflecting revenues from the venture. Two years from now, the business should generate revenues of US $ 30 million. But in the initial year, I don't expect revenues of more than $15-20 million on an annualised basis. So in the current fiscal it should contribute around $7-8 million.
Our investments in the joint venture will be $5 million. But we have invested $3.75 million until now. The balance will be invested when required.
Apart from a five-year royalty payment of five per cent on value addition that we are able to create based on our technology, we get about $2.25 million for things such as technology transfer and engineering services. So our net investment on a one-year time frame is only about $2.75 million.
What are you doing to reduce dependence on Cephalosporins?
Orchid Pharma was earlier branded as a Cephalosporin bulk actives manufacturing company focused on non-regulated markets. But now we have made significant investments in R&D, international businesses, bulk actives and formulations, and these businesses will start contributing significantly in the coming years. We are consciously de-emphasising on Cephalosporin bulk actives for the non-regulated markets.
We will leverage our strength in Cephalosporin in the formulations business, R&D and dosage forms for regulated markets. We have invested close to $80 million in the past two years spread out equally in all the four ventures. The value from these will start to accrue from the current fiscal.
In fact, our performance in the fourth quarter also reflects a marked improvement. In the past 2-3 years, topline growth has been flat and the profits have been flat or declining in some cases, but all that is set to change.
In the next six quarters we should be able to achieve 40 per cent growth in sales and 50 per cent growth in profits quarter-on-quarter. We hope to become a Rs 1,000 crore company in the next two-and-a-half years. We have made significant progress in research and hope to file two ANDAs for an anti-infective and a diabetes molecule by end of the current fiscal.
Has the acquisition of Mano Pharma helped your formulations business?
Being a late entrant in the formulations business, we were unable to gain the required critical mass to turn profitable. Our product basket consisted of only certain anti-infectives, nutraceuticals and pain management products. We believed it was essential to have a wider therapeutic basket and decided to diversify into high-growth areas such cardiovascular, diabetes and central nervous system segments.
So we had been on the lookout to acquire a company that specialised in these areas. Mano Pharma met all our criteria in terms of location, size, product range and the potential to grow. The acquisition was a shot in the arm and helped us achieve the much-needed critical mass and kept our heads above water. It's not as if we are highly profitable now, but at the same time we are not losing money.
We expect the formulations business to grow to over 20 per cent in the current fiscal. On a year-on-year basis, this would translate to 50 per cent growth.
You have done debt restructuring. What is your current cost of borrowings and how much will the company save on account of lower interest costs in the current fiscal?
We have managed to bring down our cost of borrowings by adopting measures such as replacing high-cost debt with low-cost debt, prepaying some high-cost loans and entering into currency swap loans.
Earlier our cost of borrowings was 12-13 per cent, which we managed to bring down to 8.40 per cent. We plan to reduce it to seven per cent in the next 90 days. We could save up to Rs 10 crore in the current fiscal on account of lower interest costs.
Indian companies are looking at contract manufacturing and contract research as revenue sources. Are you too looking at these?
Yes, we have done some contract manufacturing for some companies in the US, Japan and Europe. But its contribution to total revenues is not significant.
In the current fiscal, the business will contribute about 7-8 per cent to total revenues. We are more excited about opportunities in contract research. It is a good area to be in. We will definitely look at opportunities in contract research once we are through with the drug discovery programme we are currently working on.
