Orchid Chemicals has a bright future through export earnings
Fire mishap
A fire mishap took place in the company’s premises last month. The company says that the affected laboratory will be restored soon. It is true that such incidents take place sporadically even in top management companies. Tata House saw a fire accident some time back and came back to normal. There may be a temporary setback to the operations of the company, but very soon it will come back to normal. The fire accident took place in a portion of the new drug discovery laboratory located in the company’s research subsidiary Orchid Research Laboratories in Sholinganallur in Chennai city. Orchid safety team and Tamil Nadu Fire Services brought the fire under control and quenched it. Short circuit is stated to be the reason for the fire accident. No sabotage is suspected. There was damage to the laboratory and office equipment, building interiors and furniture. But no one was killed or injured. The labs of the company are insured and there will not be any impact on the company’s revenues because of this accident. This brings to light the necessity for using fire-retardant construction materials in important installations. Before construction, flammability test should be conducted on construction materials to find out whether they can withstand fire.
Alathur factory closed down
The Sholinganallur facility of the company houses 400 people. Research activities of the company are not interrupted because of the accident and are continuing in other facilities unaffected by the fire. It may be pertinent to point out that the company’s Alathur manufacturing facility was asked to close down by Tamil Nadu Pollution Control Board over non-compliance of disposable norms. For more than a month, the company could not undertake manufacturing in this facility, but it reopened in August.
Cephalosporin is the bread and butter of the company’s business
The Pollution Control Board wants the company to mix powder ash to the solid waste that was generated at the facility so that the odour emitted is reduced. The company was also directed to double-seal the waste in polythene. The company complied with the order and started stabilising sledge by adding lime, earth and fly ash to reduce odour. Orchid Chemicals has over 14000 tonnes of sledge. The company has been given four months time to stabilise this. The sledge pond of the company was found leaking and this has been arrested now. Subsequently the company has demolished this pond. The facility at Alathur manufactures 800 tonnes of Cephalosporin API (Active Pharmaceutical Ingredients) per annum. Cephalosporin contributes one third of the company’s Rs.1600 crore total revenue. The company claimed that the month-long closure of its Alathur facility had not impacted its revenues as it had adequate inventory to cover immediate demand.
Plans to raise funds
The company posted a revenue of Rs.1668 crore and a net profit of Rs.159 crore for the financial year 2010-11. Orchid Chemicals is planning to invest Rs.200 crore on therapeutic products. It is planning to raise Rs.1000 crore to redeem its foreign currency convertible bonds (FCCB). The company wants to set up a new manufacturing facility for the therapeutic products. The company has selected three niche products which are difficult to manufacture in the market. They will give the company a diversified competitive positioning in the market. Orchid Chemicals has not revealed the names of these products. K. Raghavenera Rao is the Chairman & Managing Director of the company. The company is confidant of managing the investment needed for manufacturing these products from its internal accrual. Therapeutic products generally include products used in cellular & tissue therapy, blood-related products, diabetes products, herbal medicines and dietary supplements. The company is also engaged in Phase-I molecule testing in the domains of inflammation, oncology, obesity and diabetes.
US facility sold out
The company has FCCB liability amounting to Rs.720 crore payable by February 2012. For repayment of this loan, the company is planning to raise Rs.1000 crore through local and foreign loans. The amount raised will be through equity and debt mixed together. Last year the company had to sell its US-based facility Hospira for Rs.1900 crore to settle debt. However, the company continues to supply cephalosporin API to Hospira as per the contract, which contributes 21% of the company’s topline. Hospira was the company’s lucrative injectible formulations business. As part of the deal, Orchid Chemicals signed a ten years agreement with Hospira for supplying active pharmaceutical ingredients for the solid injectible products.
Equity dilution
Orchid Chemicals is engaged in the manufacture of APIs and formulations across sectors such as anti-infectives, anti-inflammation, cardio vascular, nutraceuticals and oral and sterile products for the developed markets of US, Japan and Europe. It has a small contribution to the branded drugs market in India. The company wants to increase its share in this segment. During the financial year 2009-10, the company posted an operating loss of Rs.419 crore. Inspite of selling one third of its business in 2010-11, the company’s consolidated revenues increased by 32%. The company surpassed its annual sales growth guidance by 9%. The company has a guided sale of $500 million during the current year, which is 25% more than the figures for the financial year 2011. The company is confidant of achieving its set target. It has received approval for some products in the current year; it is expecting more approvals in USA in the next few months. The company has launched non-antibiotic products. Recently it acquired a company in USA, whose contribution will add to the topline of the company in the current year. Orchid Chemicals has 42 filings in US. Eight of them are first-to-file Para IV applications. The company has debt amounting to Rs.1600 crore including the FCCB already mentioned. The company’s fund raising exercise will result in a likely dilution of its equity by 25%.
Among the top five generic antibiotics manufacturers in the world
Orchid Chemicals is among the top five generic antibiotics manufacturers in the world. 90% of its revenues come from overseas markets. Therefore the weakening of the rupee should benefit the company to a great extent. Other manufacturers in pharmaceutical industry do not venture out to manufacture the drugs made by Orchid Chemicals as they involve intricate complications while manufacturing. Orchid Chemicals is among the very few players in the world supplying certain group of antibiotics like Pencillin and cephalosporin to the regulated markets in Europe and USA. Orchid Chemicals has entered into formulations business by either buying businesses or in-licensing brands in therapies outside antibiotics. The company acquired Karalex Pharma in USA. Karalex Pharma is a generic marketing and sales services company and has been posting a growth of 20% every year. In segments apart from Pencillin and cephalosporin, the company is expecting big growth in the next three years. Orchid Chemicals has marketing arrangements with important players like Actavis, North Star and Alvogen.
Takeover bid
In 2008, Ranbaxy attempted to take over Orchid Chemicals and almost succeeded. At that time, the company’s creditors forced the CMD Raghavendra Rao to dilute his stake in the company from 23.7% to 15.9%. In the meanwhile, Ranbaxy had acquired 14.6% stake in the company through secondary market. But somehow, the company escaped the takeover by margin of a cat’s whisker. Now the promoter’s stake in the company has increased to 30.87%. Even though Ranbaxy had exited the company completely, the share of Foreign Institutional Investors (FII) in the company has climbed up to around 15% in the beginning of the year. The most probable reason is that Ranbaxy should have transferred its stake to the FIIs.
Entry into osteoporosis
Orchid Chemicals has sealed a licensing out and distribution agreement with US-based Alvogen. This agreement will enable the company to diversify its product portfolio in the promising segment of drugs for osteoporosis and nerve disorders. Osteoporosis is a disease which results in thinning of bones in elderly people.