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Orchid MD: We should be valued higher

SMART TALK: K Raghavendra Rao, MD, Orchid Chemicals and Pharmaceuticals

SI Team  |  Mumbai 

K Raghavendra Rao
Chennai-based Orchid Chemicals and Pharmaceuticals is among the leading mid-level pharma companies that are making their mark. The company is involved in the manufacture of cephalosporin and non-cephalosporin bulk actives, formulations and nutraceuticals.

With exports spanning more than 75 countries, Orchid is the largest manufacturer-exporter of cephalosporin bulk actives in India and is ranked amongst the top five cephalosporin producers in the world.

The company's revenues for Q4 FY04 stood at Rs 207.75 crore against Rs 194.96 crore for the corresponding period of last fiscal. Net profit was Rs 7.81 crore, compared to Rs 10.02 crore for the corresponding quarter of last fiscal. The scrip is currently trading at Rs 201.25 levels at a P/E of 20.97. K Raghavendra Rao, Managing Director, spoke to The Smart Investor about the company's impressive financial performances as well as future outlook. Excerpts:

What are the factors that helped you improve profitability?

We achieved a revenue of Rs 207.75 crore for the March quarter, which is the highest ever recorded in our history. Our EBITDA margins at 21.50 per cent are higher than the industry average. Our manufacturing plants have been performing at full capacity.

Besides, we have been able to get several key regulatory approvals for our manufacturing facilities and products, which have helped us access more of the regulated markets and improve performance. We have also managed cost effective replacements for our raw materials, which has helped us improve margins.

How has the company's change in focus from non-regulated markets to regulated markets helped its performance?

The change in strategy has contributed only in a qualitative way and not in a significantly quantitative way. Though we have filed 10 DMFs last fiscal, they have not yet translated into any big revenue contributions. I expect the benefits to accrue through financial year 2005.

They are expected to go up further in financial year 2006, considering that many products that we have applied for are going off patent during the next fiscal. We would be addressing this opportunity through both API and generic formulation routes.

What is the target you have set for yourself in FY05?

We will push for topline and bottomline growth. The emphasis will be more on consolidating on the international regulatory path and maximising DMF/ANDA filings and subsequent approvals.

In the next few months we will be filing 10 DMFs with the USFDA apart from eight applications for certificates of suitability from the European Directorate for the Quality of Medicines (EDQM). We will also be filing for 15 ANDAs for formulations in the dosage form. From 20 international filings in the last fiscal, we will be moving up to 33 in FY05.

What are the new developments on the product front?

We are in the antibiotic segment. As part of our strategy to move into regulated markets, we have identified 15 key antibiotic products. Orchid had earlier signed a marketing pact with Apotex Corporation, a North-American generics major to distribute eight injectable formulations of cephalosporin in the US.

The company is also in advanced stages of discussions to finalise a marketing arrangement for the oral range of cephalosporin. In due course of time we plan to market our entire range of cephalosporin products in regulated markets.

Tell us about Apotex.

Apotex is a $1 billion company, which is focused on regulated markets like the US and Western Europe.

It has a 25 per cent market share in all the products it markets. Before tying up with Orchid, Apotex did not have an injectable cephalosporin capability.

Since we had that capability and were looking for a front end to market our cephalosporin range in developed markets, our strategy fell in line with that of Apotex's. The profits are shared with Orchid getting a higher share of the profits than Apotex.

What is the progress on the joint venture with North China Pharmaceutical Corporation?

North China Pharmaceutical is also a $1 billion company. It, too, did not have any cephalosporin stable and was looking for partners.

So we entered into an agreement with it, where we supply the intermediates and it markets them in its domestic market. The profit sharing is on a 50:50 basis.

Tell us about your US generics strategy.

We are discussing with prospective partners for any possible marketing alliance. Our aim is to get into the oral cephalosporin segment in the US. We are looking for partners who will take the final dosage form from us before marketing it in the US.

As per the plan, we will develop the dosage form and supply it to our partners who will have exclusive marketing rights in the US. We are planning 33 new filings during the current fiscal.

Based on these filings, USFDA and other regulatory authorities will conduct their inspections. The approvals for these filings are expected to be available by the end of 2005, after which we will be marketing them in the US markets through our partners.

How has the partnership for basic research with Bexel helped Orchid R&D?

We have a 50:50 JV with Bexel. Since we are a late entrant into the industry, especially in the area of drug discovery, we thought of joining hands with players who have the expertise in the field. Bexel had the intellectual capacity which we wanted.

We develop a drug till the pre-clinical stage, from where Bexel takes it up and do the phase I and the phase 11 stages. We are not big enough to support high-end research. There are a lot of imponderables in those stages which we want to avoid. However, once we are in a self-financing position to do so, we will be looking at it.

Are you happy with the company's current valuations?

One is never really happy. It is always a case of whether the glass is half full or half empty. Yet I think the scrip is fairly valued at present.

However, we have to look at the future growth potential of Orchid. Considering our product pipeline and prospects for the next couple of years, we should be valued much higher.

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First Published: Mon, May 17 2004. 00:00 IST