How Orchid bloomed after Hospira deal

In Q3, the pharma company posted a net profit of Rs 52.5 crore, against a loss of Rs 16.8 crore a year ago.

Orchid Chemicals and Pharmaceuticals is back in the news, within an year of selling off its most valued business of generic injectables to US based Hospira for about Rs 1,900 crore.

The company’s third quarter results showed Orchid had turned around strongly to post not only profits, but also reach almost the same level of business that it had during the pre-Hospira deal days. Then, more good news followed for the company, with its chairman and managing director, Kailasam Raghavendra Rao, being conferred the Padma Shri award by the President of India on the eve of the Republic Day this year.

 

In the third quarter, Orchid posted a net profit of Rs 52.5 crore, against a loss of Rs 16.8 crore a year ago. For the nine months, the company’s net profit stood at Rs 98.20 crore, compared with a net loss of Rs 59.82 crore in the corresponding period a year ago. Despite selling off assets that contributed about 35-40 per cent to the revenues, its total operating revenue rose to Rs 1,159.02 crore from Rs 955.85 crore in the corresponding period and Rs 1251.04 crore in the full year 2009-10.

“In this second innings, we are on a strong earnings platform that will see sustainable big growth in future,” says Raghavendra Rao.

The deal with Hospira in December 2009 was a win-win deal for both the companies, says Rao. Orchid was sitting on a big debt pile of Rs 2,900 crore. The deal helped Orchid pay about Rs 1,400 crore to reduce the debt to Rs 1,700 crore and overall debt-equity ratio came down from 4.5:1 to about 1.7:1. The company plans to bring this down to 1:1 by next year, he says. Hospira is still a major client of Orchid (It buys active pharmaceutical ingredients from Orchid) and contributes almost a fourth of the overall revenues.

The life at Orchid after the Hospira deal was more challenging, Rao says. The deal caused the company to lose its US FDA-approved betalactum product manufacturing sites in India along with 450 employees and a research and development facility. More than that, C B Rao, deputy managing director and a founding board member, chose to leave Orchid to head Hospira’s India business.

“It was a painful decision, but it was good for us. We knew Hospira was going to be a long-term client for us and C B Rao knows Orchid very well,” says Raghavendra Rao.

The first thing Rao did after the Hospira deal was to restructure the entire business under three verticals. Bulk drug business was brought under Chief Operating Officer Edna Braganza and formulation business was put under Chief Operating Officer Madhusudan G Rao. Orchid’s entire research activities were pooled under Chief Scientific Officer and Orchid Research Laboratories Director B Gopalan.

“Then we decided to focus business on our core strength — cephalosporins, penicillin and penems — and areas such as cardiovascular, pain management, central nervous system and diabetes. We could launch products without competition in many markets and this strategy was critical for our turnaround,” says Rao, who graduated from the Indian Institute of Management-Ahmadabad in 1977, when he was 19.

Going forward, the company plans to develop a basket of about 50 products for launch within the next 2-3 years. Orchid, which made a small acquisition in the US recently, is also looking at similar acquisitions to gain scale in that market.

Son of a railway clerk and someone who sacrificed a big posh villa, a chauffeur-driven BMW car and a job with the salary of $10,000 a month in Gulf to pursue his dream of starting his own enterprise, the life of Raghavendra Rao is a rags-to-riches story built around his abilities to start and nurture businesses.

His first job was with Kwality Ice Cream in Mumbai. There, he could convert one of its manufacturing units in Ahmedabad into a profitable venture. After a brief job with Ashok Leyland in Chennai, Rao moved to a small company, Standard Organics, promoted by K Anji Reddy, the founder of Dr Reddy’s Laboratories, in 1986. Rao rose from the position of a project manager to vice-president (operations) and was instrumental in setting up two plants and a chain of medical diagnostics centres.

Then, Rao went to Oman “to earn money to set up his own business in India”. He joined the Al Buraimi Group that had a revenue of $2 million and a small hotel with 16 rooms as its only business. Soon, Rao’s skills helped the group set up a five-star hotel, besides its first pharmaceutical company and steel mill in Oman and the country’s largest garment factory. Al Buraimi Group’s revenues rose to $80 million in just four years.

Once his bank balance reached about Rs 2.5 crore, Rao decided to quit the job and return to India. At a two bedroom apartment at Cathedral Road in Chennai, Orchid Chemicals and pharmaceuticals started operations in 1992. Through the journey from Standard Organics to Oman to Orchid, a team of four people — Edna Braganza, Narayan Reddy, Suresh Babu and Mani — accompanied Rao and helped made Orchid what it is on Tuesday.

Following various equity infusions for expansion over the years, Rao’s stake in the company diluted to about 18 per cent three years ago. While Orchid’s business was experiencing a difficult phase, Ranbaxy-promoted Solrex Pharma acquired close to 15 per cent in the company from open market, triggering speculations of a hostile takeover. Rao acted swiftly to bring in a white knight in Cyrus Poonawalla, the owner of Serum Institute of India, and increased his stake in the company. Now, he holds 31 per cent in Orchid and the next highest stakeholder is Cyrus Poonawalla and his group, with 9 per cent. After the acquisition of Ranbaxy by Daiichi Sankyo, Solrex sold its shares to exit Orchid.

Rao would think of diversification or try a new business only after the company reaches a big scale.

“I need to take Orchid to an autopilot stage to think of a diversification or try a new venture. Anyway, I am not old enough to think of retirement yet,” says the 52-year old. His elder daughter is a practising doctor at Sree Ramachandra Medical University in Chennai and the younger one is studying in the US.

For the time being, Rao is concentrating to captain Orchid to script a successful run in its second innings.