Deployment of funds

A 'desi Viagra' is what most domestic pharmaceutical companies are chasing today. And the Rs. 359-crore turnover, Chennai-based Cephalosporin bulk drug major, Orchid Chemicals and Pharmaceuticals, does not want to be left behind. It is all set to join the bandwagon with its brand 'Ulti-Mate'.

Having been involved in the export of Viagra's active ingredient, sildenafil citrate, in bulk, Orchid Chemicals is expecting a green signal from the Drug Controller of India to enter the domestic market with its product. The market is already seeing players like Ranbaxy Laboratories, Torrent Pharmaceuticals, Zydus Cadila, Unichem Laboratories and Cipla actively seeking a foothold in this segment.

Meanwhile, industry watchers are musing whether 'Ulti-Mate' will do the magic of perking up the scrip price at the bourses. Not long ago, the scrip shot up to Rs. 420, hitting the National Stock Exchange's (NSE) circuit breaker consecutively for several days. And after that, it was a free fall with the scrip again hitting the lower circuit breaker on its downward path. On 2 February 2001, the scrip closed at NSE for Rs.98.30, a P/E of 7 times.

While the markets do not see much value in the scrip, the International Finance Corporation (IFC), an arm of the World Bank, has decided to take fresh exposure in the company, investing $30 million. The company will issue IFC with Foreign Currency Convertible Bonds (FCCB) on a preferential basis in two tranches for that amount.

In the first tranche $20 million of FCCB will be issued, with the conversion into equity within 18 months of the subscription but not later than December 2002 at Rs. 220 per share. After the conversion, IFC's stake in the company will be 13.7 per cent.

In the second tranche, FCCB's totalling $10 million will be issued with the conversion being optional. Here, the conversion price will be the higher of the following: Rs.280 per share or earnings linked price, based on the audited accounts for the financial year ended 2004. However, the total ceiling on IFC's shareholding is fixed at 17 per cent of the company's equity.

The bonds will carry a coupon rate of around 7 per cent. While $20 million will be immediately drawn, the company will draw the second tranche after six months.

It may be recalled that in November 1999, the company got Rs. 175 crore through private placement with Schroder Ventures, increasing the equity base to Rs. 27.99 crore from Rs. 17.34 crore. When IFC converts its bonds into equity, the company's capital base will go up by another Rs. 5.7 crore.

So what have the overseas investors seen in Orchid Chemicals that the domestic investors are blind to?

"Long-term prospects based on our plans," says Mr. D. S. Bhaskara Raju, financial controller of Orchid Chemicals. According to him, Orchid is the only pharma company in the country to have the ISO 14001 certification and classified as a zero discharge company. The necessary plant certifications are soon expected, thus enabling the company to enter regulated markets, he adds.

Deployment of funds

Already flush with Schroder Ventures' money, the company's kitty will swell further with IFC's investment. According to Dr. C. Bhaktavatsala Rao , deputy managing director of the company, the Schroder Ventures' money is being used for setting up a new formulations plant (outlay Rs 50 crore) at Irrungattukottai near Chennai, besides two more plants near its existing Chennai facility (outlay Rs 15 crore each) to manufacture unique nutraceutical bulk and formulations. It will also use the funds to upgrade its Aurangabad and Chennai facilities and purchase of sophisticated lab equipment.

With the money from IFC the company has already planned a research and development (R&D) centre for molecular biology and a bio-tech with animal house (Rs. 40 crore). It also plans to get into production of bio-tech products like industrial enzymes (Rs. 50 crore) and creation of fresh bulk capacity (40- 50 tons per annum) that conform to USFDA stipulations at Chennai (Rs. 100 crore).

The balance will be used for acquisitions and working capital needs. For quite some time, Orchid Chemicals has been on the look out for suitable pharma units within India and overseas. The company also succeeded in bagging the Ajanta Pharma's Aurangabad bulk drug unit.

According to some analysts', the reason for the scrip being hammered down mercilessly is constant equity expansion, the non-actualisation of some of its plans announced earlier, the pressure on the bulk margins and an increase in input costs.

Take for instance, the company's performance on the formulations side. Contrary to the earlier projections of 20 per cent, formulations' sales contribute just around 5 per cent. A late entrant in the finished dosage segment, Orchid Chemicals is still going slowly on formulations, limiting its field force strength to 180.

Reasons Dr. Rao, "We held back the field force expansion consciously to reorganise the marketing set up. We will soon start hiring hands."

But before that happens, following the footsteps of Glaxo India, Orchid Chemicals will be dividing its sales force into various therapeutic segments. "The focus will be on life style disease segment (hypertension, cardio vascular, lipid, liver protection, etc.) through a separate division christened Specialty Division," adds Dr. Rao.

Interestingly, not restricting itself to allopathic formulations, Orchid Chemicals is also into ayurvedic formulations and nutraceuticals. Tying up with JSS College of Pharmacy, Coimbatore, it has developed an ayurvedic lipid-lowering drug. The clinical trials for the drug are being conducted now. Similarly, formulation process is on for an anti-diabetic, a rejuvenator and hepato-protective drugs.

The company is also negotiating with a couple of overseas pharma companies for its antibiotic-polymer adducts developed jointly with an Italian R&D lab. While the efficacy of the drug has been proved, the company is awaiting for patent protection.

Speaking about herbal nutraceutical product marketed by Orchid Nutracare Ltd, UK –

the company's 65 per cent subsidiary – Dr. Rao says, "The marketing strategy is being redrawn by setting up a distribution network. The initial plan of selling the product via mail orders did not succeed due to stiff competition."

Bulk problems and prospects

But the company's problems mainly stem from its bulk drug business. Orchid Chemicals is facing issues like decreasing margins, increasing input costs – the company's major input Penicillin G prices are firming up now – and delayed payments from buyers based in new markets.

Till two years ago, nearly 60 per cent of the company's bulk exports were to China. On the advice of Schroder Ventures and taking into account the long-term interests, Orchid Chemicals started looking at new markets.

A Rs. 2.3 crore default by a Chinese company accelerated the process of identifying other markets in Africa and Europe. "Today exports to China account to just 40 per cent of our total exports," says Dr. Rao. The company's Chennai plant has been upgraded to meet the USFDA standards for two products. Dr. Rao is hopeful of getting an approval soon, thus facilitating the company's entry into regulated markets.

But entering into a new market has its own problems like selling at low rates, longer credit period, etc. The impact of these could be seen on the company's bottomline. For the nine-month period ended 31 December 2000, Orchid Chemicals registered a net profit of Rs. 25.50 crore on a turnover of Rs. 270.53 crore as against Rs. 27.20 crore net profit on Rs. 260.32 crore sales clocked for the corresponding period the previous year. And going by the performance till date, the company would be closing this fiscal with a turnover of Rs. 370 crore.

Given this scenario, the IFC funding has come at the most opportune time. "With a shareholder like IFC, Orchid Chemicals can now command respect, market visibility and better price in African and other developing markets," opines Mr. P. Vijay, a research analyst with Navia Markets, Chennai.

Reiterating that investors will not be disappointed with investing in the company, Dr. Rao says, "Research on new drug discovery, and new drug delivery systems are going to be our focus. If Cephalosporin bulk is our first horizon, entry into formulations, bio-tech areas like industrial enzymes, nutraceuticals and focus on R&D will be our second horizon. You can expect some interesting announcements in two months time." So let's wait and see.