Speech delivered by the Chairman at the 20th Annual General Meeting – September 20, 2012
On behalf of the Board of Directors, I welcome you all to the Twentieth Annual General Meeting of Orchid Chemicals & Pharmaceuticals Limited (Orchid). It's my privilege to address this gathering and share my insights about the Company. You must have received the Annual Report for fiscal 2011-12, and with your permission I shall take it as read.
I will now provide an in-depth summary of the challenges and opportunities before your Company, against the backdrop of the current business scenario.
Global economic scenario
We all know that the global economic growth was adversely impacted in 2011-12 by persistent Eurozone crisis and sluggish economic performance in the US. Growth in emerging economies has also been lower than expected. The global growth in 2011 stood at 3.9% and projections for 2012 and 2013 are estimated at 3.5% and 4.1% (IMF estimates), respectively. These forecasts, take into account two important assumptions: first, there will be adequate policy initiatives in the Eurozone to seek a lasting solution to the crisis; and second, austerity measures will be gradually eased to accelerate growth in developing countries.
Summing up 2011-12
You will be glad to note that the global pharmaceutical sector continues to sustain moderate growth, even in an uncertain business scenario. Against such a backdrop, your Company witnessed satisfactory revenue growth and managed to stay profitable largely driven by an expanded product portfolio and greater market penetration. In the last two years, Orchid has emerged as one of the preferred partners for several big pharma companies and has established long-term relationships with Hospira and other marquee clients.
In 2011-12, your Company braved issues like the Alathur API plant closure and the fire accident in the R&D centre both of which took everyone by surprise. These incidents had an adverse impact on the operations of your Company. Key product verticals have begun witnessing increased competition in the regulated markets thereby yielding lower margins from the partners. Coupled with this, a hardening of the interest rates especially for domestic loans led to a higher interest outflow. All these factors lowered our profitability compared to the previous fiscal. The current fiscal too is expected to be flat on account of this continuing pressure on margins.
The successful redemption of the outstanding Foreign Currency Convertible Bonds (FCCBs) in February 2012 was an important event for your Company. Despite the fact that the depreciating rupee coupled with the global economic slowdown made the redemption process difficult, your Company managed to raise ECBs (External Commercial Borrowing) to the tune of USD 96.5 million and together with internal accruals was able to redeem the outstanding FCCBs to the tune of USD 167.64 million on due date.
As members are aware, research and development provides critical support to create a consistent product pipeline and sows the seeds for the future growth of a Company. Over the years, we have emerged as a partner of choice for global pharmaceutical companies for new chemical entity (NCE) development, novel drug delivery systems (NDDS) development, custom synthesis and R&D services. Your Company possesses a mix of proprietary and collaborative R&D commitments, demonstrating a de-risked R&D model.
During 2011-12, your Company successfully completed the Phase I trial of its proprietary molecule, OCID 2987, an orally administered PDE4 (phosphodiesterase 4) inhibitor in Europe. This molecule is primarily used for the treatment of inflammatory disorders.
Diakron Pharmaceuticals Inc., USA, a research subsidiary of Orchid is also making considerable progress with clinical trials on its clotting disorder molecule.
Your Company is working on a robust drug discovery pipeline with leads in several high growth therapeutic segments like diabetes, inflammation, cancer, auto-immune disorders, anti-infectives and obesity. We are currently engaged in transitioning our NCEs through various stages of pre-clinical and human clinical studies and based on the successful completion of the trials, look forward to entering into out-licensing agreements with multinational pharmaceutical companies.
I am pleased to inform you that our anti-infective collaborative research initiative with Merck & Co., focused on the discovery, development and commercialization of novel agents for the treatment of bacterial and fungal infections, is advancing well. In 2011-12, your Company achieved a significant milestone in this research collaboration.
As your Company's research projects progress into advanced stages, in 2011-12, your Company took a conscious decision to merge its research subsidiary, ORLL(Orchid Research Laboratories Limited) with the parent company so as to internalise the value generated from such successful research projects going forward and also to aid operational synergy.
Your Company is focused on strengthening its regulatory pipeline which is expected to generate new growth opportunities following approvals from the respective regulatory agencies. Your Company's strong product basket will deliver a positive thrust to the revenues going forward. Your Company has a cumulative count of 71 regulatory filings in the generic formulations domain across the Non-penicillin, Non-cephalosporin (NPNC) and Cephalosporin product domains [43 ANDAs (Abbreviated New Drug Application) in the US and 28 MA (Marketing Authorization) filings in EU], including eight Para IV FTF (First-to-file) filings. Of these, 46 approvals are already in place (29 in US, 17 in EU).
Moreover, with more than 100 products under development, your Company will further strengthen its regulatory filings / approval count going forward.
Business transfer of Penicillin and Carbapenem API business
Over the years, Orchid has weathered multiple challenges, capitalised on several product / market opportunities, thereby, building a strong business base. At this point, I would like to brief you on an
important decision which we took recently.
Your Company has entered into an agreement to transfer its Penicillin and Carbapenem API business and the API facilities in Aurangabad (Maharashtra), along with the associated R&D infrastructure in Chennai to Hospira for a cash consideration of around USD 200 million. This business transfer agreement includes the related Penicillin and Carbapenem product portfolio and pipeline as well as associated 830 employees.
This agreement builds on the existing product development and commercialisation relationship between Hospira and Orchid.
Rising input costs coupled with increasing end-product competition has started impacting the margins. Moreover, a high debt burden along with rising interest rates has been leading to a huge interest outflow. All this is adversely affecting your Company's profitability and growth prospects. Thus, looking at the situation and the future growth aspirations of your Company, the management has taken this prudent decision.
The proceeds from this business transfer will be utilised for de-leveraging Orchid's debt position and also facilitate our foray into newer product verticals.
This transaction has been approved by Orchid's board of directors and is subject to the approval from the shareholders, regulatory and legal approvals, as well as other customary closing conditions.
You Company's corporate evolution is the result of the hard work and consistent determination to transform its vision into reality. Today, your Company enjoys strong end-to-end capabilities with presence across the entire pharma value chain, backed by strong research and manufacturing capabilities, along with front-end presence in key markets. Your Company has always ensured the highest standards of quality and is known across the world for its quality excellence and stringent regulatory compliance.
Moving ahead, your Company's focus will be on consolidating its existing business verticals and optimising the product-mix in high value markets.
Your Company's current product portfolio together with the product basket under development, spread across cephalosporins and non-antibiotics will add strong impetus to the performance of your Company going forward. These initiatives will help your Company bridge the revenue drop on account of the business transfer to Hospira.
Your Company also plans to foray into newer high-margin, low-volume and low-capex therapeutic verticals. These verticals by nature of the complex chemistry and stringent manufacturing process requirements have limited global competition, which will give your company a robust revenue / market base in the future. The success and strong base that your Company built in the global antibiotic arena will be replicated in these verticals.
On behalf of the Board of Directors, I express my sincere gratitude to the Central and State Governments, financial institutions, public and private sector banks, Government agencies and Nongovernment institutions for reposing their faith in the management.
I am also thankful to our valued stakeholders, namely vendors, customers, strategic alliance partners
and business associates for supporting our vision and business strategies. I also acknowledge the vital role played by our valued employees in our corporate evolution. Finally, I am grateful to our community of shareholders for helping strengthen our technological prowess and business outlook.
I look forward to your continued support.
Thank you for your attention!