Orchid Chemicals: gap between promise and performance

Early this year, officials of the Chennai-based Orchid Chemicals & Pharmaceuticals told journalists to expect some interesting announcements around April-May. The only announcement that was made, in June, was the launch of a health portal.

And in July the company gives its shareholders a disheartening announcement of reduced first-quarter net profit on a marginally higher turnover.  Further the company's UK subsidiary, Orchid Nutricare, too showed dismal performance.

The company finds itself on a very difficult wicket. While its cephalosporin bulk drug is suffering a price and margin squeeze in the international markets, it formulation division suffers similar fate in the domestic market.

This has brought down the company's first quarter net by Rs. 1.98 crore compared to the corresponding period of the previous year. The company closed the first quarter with a turnover of Rs. 88.37 crore and an after tax profit of Rs. 7.21 crore as against Rs. 87.83 crore and Rs. 9.19 crore respectively clocked for the same period the earlier year.

For the past two years Orchid Chemicals' margins have been under pressure. Last fiscal the company registered a net profit of Rs. 35.75 crore as compared to Rs. 38.59 crore clocked for the fiscal ended March 2000. As a matter of fact, net profit for 2000-01 would have been lower by Rs. 4.42 crore but for changing the method of accounting research and development expenses.

Agreeing with the perception that promises and performance are not going hand-in-hand Sanjay K. Sehgal, director and partner Schroder Capital Partners (Asia) Pte Ltd, Singapore says, "The various plans are at different stages like a disjointed chain. It will
take some more time for the links to unify and show results." But "how long" is the million-dollar question that nags ordinary shareholders as the company's scrip is changing hands for around Rs. 70.

K. Raghavendra Rao, managing director, Orchid Chemicals is a man under pressure to show some results not only to the domestic shareholders but also to overseas investors. The promises made earlier - new drug delivery systems/drug inventions, becoming a contract research base for overseas pharma companies, signing co-marketing agreements with other pharma companies etc- and the actual performance don't sync.

The much expected innovation of polymer adduct that would reduce medicine dosage got stuck as formulation companies didn't show interest in the product. Says Mr. Rao, "We have done up to animal studies and now working with generic pharma companies who would be interested."

According to him the company is undergoing a paradigm shift that will lay down the foundation of the future growth. As a result the pangs of labour cannot be escaped.

Adds Dr. C. Bhaktavatchala Rao, deputy managing director, "The entire business of the company is divided into three segments viz core (cephalosporin bulk), emergent (formulations) and embryonic (research, new drug discover and bio-technology)".

In analysis of the management regarding the company's core business, the global cephalosporins business is worth around $ 9.6 billion. Within this, Penicillin-G 9, Pen G- based cephalosporins constitute around $ 2.5 billion and Ceph-C based cephalosporins around $ 7.1 billion.

Of the total market, companies in USA and Europe consume 23 per cent each, Japan 20 per cent, 12 per cent in China/India and rest of the world 22 per cent. Companies in Europe and India share the total market besides MNC's having their own captive plants.

China, till some time back a major importer has started manufacturing the bulk and thereby impacting the market dynamics. As a matter of fact, Orchid Chemicals is a major exporter to China.

Moreover the cephalosporin market is maturing and the opportunity for companies like Orchid Chemicals lies in getting into regulated markets like USA and Europe.

The company has filed 5 drug master files and 14 process patent applications in USA. The company's Alathur plant near Chennai is expecting US FDA approval for manufacture and export of two cephalosporins.

"In the case of bulk drug, the focus now is on regulated markets like Europe and USA," says Mr. Sehgal. This now possible as Orchid Chemicals has got the European COS (Certificate of Suitability) from European Directorate for Quality Medicines, France for
bulk ceftriaxone sodium, a sterile cephalosporin product.

New dosage for formulations

Officials of the company blame the formulations division Orchid Healthcare for dragging down the company's bottomline. As against Rs. 21 crore turnover logged during 1999-2000, the division was able to achieve just Rs. 16 crore last fiscal.

In order to give better direction and focus to this division the company has roped in the former managing director of Astra IDL Mr. A.R. Hegde to head Orchid Healthcare.

Bringing an outside perspective to the company's formulations division Mr. Hegde, director and chief executive officer, Orchid Healthcare says, "The company should have entered the cephalosporin formulations bit late." He also adds that the product mix will be revamped in tune with the domestic as well as overseas market requirement.

The overseas market he talks about is for dietary supplement now exported to USA. Orchid Chemicals is expecting registration from Australia for another product.

According to Mr. Sehgal, Schroder Capital has advised Orchid Chemicals to look out for mergers and acquisitions for accelerated growth.

So once again Orchid Chemicals officials are assuring the shareholders that the present labours will fructify soon. And shareholders have nothing but to wait till that happens.