'We may be interested in buying back our stock'

Q&A: K Raghavendra Rao

Orchid Chemical and Pharmaceuticals’ co-founder and managing director K Raghavendra Rao’s characteristic suaveness cannot camouflage the mild bitterness he is feeling. The man who, along with motley team of co-founders built Orchid from scratch to a Rs 1,300-crore firm in a decade and a half, is still not reconciled to either Ranbaxy’s subsidiary picking up a 14.7 per cent stake in his firm a few months ago, or the circumstances under which this happened. To raise capital, Rao had pledged a part of his shareholding to India Bulls and Religare, but had to sell them when stock prices collapsed and he had to make good the margin money commitments — that’s when Ranbaxy’s Rexcel picked up the shares. Ranbaxy’s sale to Daiichi Sankyo complicates things further. Rao, who thinks Orchid will be a billion-dollar firm in the next five years, shares his vision with S Kalyana Ramanathan.

Has the presence of a new and large shareholder changed your outlook and vision for the company?

I believe equity, management and business can remain independent. If a group wants to do business with us, it need not be a shareholder in the company or even be a part of the management for that matter. Having said that, our business relations with Ranbaxy will continue, under which we will supply specific products they can take to various geographies. In that sense, they will be our business partner like any other company in the world.

We have a vision to make Orchid a billion-dollar company in the next five years — that will make Orchid three times bigger than what it is now. We are very much on track in achieving this. The investments from here to then will be marginal. All our investments in the last two years are now in place and have been made with this vision in mind.

What is the strategy you have put in place to achieve this, and what do you see as possible obstacles?

Right now, cephalosporin (an antibiotic) is the sole contributor to the bottomline of the company. Going forward, we want to bring down contribution from cephalosporin to a third of our profit, with the rest contributed equally by other antibiotics and non-antibiotics. There are two challenges that can come between us and our vision. One, innovator companies can challenge our new products, but that can only delay our entry into certain markets. Two, certain pricing and competitive behaviour can come in the way of our operations in certain niche segments. But these are challenges we can handle.

Are there any specific products you are working on that will help you diversify the range of products you offer?

We will focus on four therapeutic segments — pain management, diabetics, oncology (cancer) and infections. The target is to have four new molecules ready to be licensed to other manufacturers in the next five years.

This does not mean we will not manufacture them ourselves. Our R&D efforts have got a major impetus now with B Gopalan, formerly chief scientist in Glenmark India, heading our research lab.

Despite a consistent performance in the past, Orchid declared a Rs 32-crore loss in the first quarter of this fiscal.

That was purely a notional loss we had to show thanks to forex loss on our FCCB loan of Rs 800 crore. This is a loan we cannot repay till 2012 as per RBI guidelines. Thus, we had to show the forex fluctuation loss unless we convert it into equity. But we have maintained a strong profitability and growth at the operations level (Orchid’s EBIT and before exceptional items was up by 32 per cent during the first quarter).

Orchid will lose its EoU status next year, which means your tax payments will increase, hitting the bottomline. How do you plan to handle this?

We have a 27-acre plot in Visakhapatnam (Andhra Pradesh) in the pharmaceuticals SEZ where our operations can be tax-friendly. There are no immediate plans, though, to use this land. We will take a call on this after 2010.

Ranbaxy’s move to take a 14.7 per cent stake in Orchid through its subsidiary Rexcel was a hostile move. Now that Japan’s Daiichi Sankyo will be soon controlling Ranbaxy, where does it leave Orchid? Would you make a move to buy back what Rexcel holds in your company?

We do not know how Daiichi sees Orchid in its scheme of things. As for buying back the shares, neither party have approached each other. We may be interested in buying back and talks on this can start only after the Ranbaxy-Daiichi deal settles. I am not saying that Orchid’s promoters or shareholders will buy back the shares Rexcel holds. We can facilitate this by bringing in outside investors too, who we share the vision we have for Orchid.

Despite many opportunities in the pharmaceuticals sector, the core team that founded Orchid 16 years back have stayed together, and they do not have significant shareholding in the company. Isn’t that odd?

We have a very professional approach. The rate at which we are growing and our vision for the future make Orchid a happening place. Even the person who served you tea owns some shares in the company. Our scientists get complete support from the management. They find that the company offers a great vent to scientific temper. In bulk and formulation, the company is all about people, products, plans and process. We have it all.