Orchid Chemicals and Pharmaceuticals

The fiscal 2008-09 was challenging for us. In an environment of global
 financial meltdown, we encountered additional constraints with key
 product approvals delayed, capex programmes increasing debt and
 interest as well as an unprecedented currency fluctuation denting
 profitability. Consequently, revenue growth was muted and margins
 declined.
 
 Despite the odds we completed our asset build-up and the current year
 will mark the beginning of a new growth wave centred around product
 diversification leading to higher returns.
 
 Strategic direction
 
 I must briefly recap some developments. In our initial growth phase, we
 achieved a dominant status as a global cephalosporin antibiotic API
 player.  The more recent phase saw us diversify our asset base to cover
 not only APIs but also finished dosage forms (FDFs) and extend beyond
 cephalosporins into penicillins and carbapenems in the antibiotics
 range and several non-penicillin, non-cephalosporin products in the
 lifestyle product range. We established a strong presence in the US
 cephalosporin generics market and are poised to replicate our success
 in other antibiotic and non-antibiotic areas.
 
 Over five years, we invested significant funds to strengthen
 capabilities, create facilities and expand capacities. A large part of
 these investments was funded by debt so that the Company could
 capitalise on market opportunities with speed. The reliance on debt has
 no doubt translated into a temporarily higher interest liability but
 will be mitigated once our product diversification strategy starts
 paying off.
 
 Our investments are focused on global scale capabilities in four
 verticals – cephalosporins – orals and injectables, penicillin
 injectables, carbapenems and non-antibiotics, several of them as Para
 IV FTF applications. Currently, 85-90% of the Companys turnover is
 still derived from cephalosporins, even as we committed investments in
 other verticals. This created a significant stress on our operations
 last fiscal. With the recent and envisaged product approvals and the
 resulting product-market diversification, the revenue contribution is
 anticipated to change.
 
 Cephalosporins: We enjoy a dominant status in the US cephalosporin
 generics market, in the form of marketing partnerships with Apotex and
 a leading distribution house. We are poised to extend our coverage to
 the EU with two major pan-European alliances with Actavis and Hospira.
 Plans are also afoot to launch novel dosage forms in this segment, to
 ensure continued niche positioning.
 
 Penicillins: Revenues from this segment commenced with the launch of
 Piperacillin-Tazobactam injections in Australia, Europe and Canada in
 2008-09.
 
 We anticipate a launch in the US in 2009-10 based on likely regulatory
 approval. In each of the markets, the Company hopes to carve out a
 significant share.
 
 Carbapenems: Carbapenems is another futuristic segment where your
 Company has a unique development and manufacturing position globally,
 on an end-to-end basis in APIs and dosage forms. The revenue from this
 segment are anticipated to accrue from this fiscal and increase
 subsequently.
 
 Other product segments: Orchid has developed a significant product
 pipeline covering other lifestyle categories such as central nervous
 system, cardiovascular, anti-emetic, gastro-intestinal and pain
 management drugs. A few approvals have already been received and there
 will be significant product launches in this segment in this fiscal and
 beyond.
 
 Although each segment will continue to grow, the relative contribution
 from cephalosporins will progressively decline while that from
 penicillin injections, carbapenems and oral non-cephalosporins will
 increase. As our investments begin yielding significant returns, our
 financial profile will get deleveraged and profitability strengthened.
 
 Key growth engines
 
 Product pipeline: Orchids robust pipeline is expected to catalyse
 growth in the following ways:
 
 We expect to launch around a dozen products in the cephalosporin and
 other categories in the US and the EU in 2009-10 with an estimated
 market size of US.6 billion (pre-patent expiry).
 
 The already launched high value products namely Cefdinir and Cefepime
 among others, in the US will continue to generate sizeable revenue from
 2009-10.
 
 The pipeline of carbapenems represents a major first mover opportunity
 and could improve with newer carbapenems getting added.  As we extend
 our marketing alliances to cover additional products and additional
 markets, we will enhance product-market scope.
 
 The recently completed second antibiotic injectables line for certain
 niche dosage forms will help us access an attractive market segment.
 Our launch of Piperacillin-Tazobactam injections in Australia, Europe
 and Canada in 2008-09 should significantly grow our business and
 profitability in the coming years
 
 API alliances: Apart from ensuring continued growth in API business, we
 also entered into agreements with select corporations to supply select
 antibiotic bulk actives on a long-term basis. These APIs will be
 sourced by them after approvals by the regulatory authorities for site
 variation. This arrangement will enhance our asset utilisation and
 improve our revenue as well as profitability.
 
 Paragraph IV first-to-file products: Within a short span of entering
 the non- antibiotic product range, Orchid filed 7 ANDAs with US FDA as
 Paragraph IV, first-to-file (FTF) filings out of a total of 21
 non-antibiotic ANDA filings in the US. We are also working on
 additional Para IV FTF applications for products with a large estimated
 market. These Para IV FTF products should drive a greater share of our
 business.
 
 Japan - new focus
 
 We have also embarked on a new initiative to diversify our presence in
 the exacting Japanese market.
 
 Japan is the second largest pharmaceutical market and the second
 highest healthcare spender. The pharmaceutical sales in the Japanese
 market increased by 3% from US.6 bn in 2007 to US.6 bn in 2008.
 The Japanese government is committed to increase the share of generics
 from the current low of 4% to as high as 30% in the years to come.
 Orchid, with its balanced coverage of antibiotic and lifestyle
 products, is well suited to meet the requirements of the Japanese
 society, which is marked by an ageing population and spiralling
 healthcare costs.
 
 During fiscal 2009, we established Orchid Pharma Japan to support our
 foray into Japan. We have so far filed three DMFs for Japan with more
 in the pipeline in 2009-10 and beyond. While continuing discussions on
 potential API sales, we are discussing an initial basket of generic
 dosage form products with potential partners.
 
 Innovation – new chemical entities
 
 The Company reinforced its drug discovery focus with an acceleration of
 discovery and development activities in the selected therapeutic areas
 of diabetes, pain management, oncology and anti-infective products. A
 rich compound library was developed in these areas with several
 interesting discovery hits and pre-clinical leads. Two new chemical
 entities in the inflammatory and oncology areas are undergoing
 regulatory toxicology studies and could be positioned for Phase I
 studies upon successful conclusion.
 
 We are also undertaking the development and manufacture of an anti-
 coagulant drug candidate initially discovered and developed through
 Phase I by Merck & Co., Inc, US. We invested in Diakron Pharmaceuticals
 Inc, which has an exclusive license agreement with Merck for the
 compound. Our investment in Diakron will eventually result in majority
 control. The compound is a novel investigational oral anticoagulant
 drug with considerable potential.
 
 We also entered into a major collaboration and licencing agreement with
 Merck & Co., Inc for the discovery of novel anti-infective drugs. Under
 the agreement, Orchid will identify and develop novel anti-bacterial
 and anti- fungal compounds as clinically validated drug candidates. We
 will undertake discovery and candidate development through Phase II a
 human clinical trials.  Merck will consider late stage clinical
 development and subsequent commercialisation based on regulatory
 approvals. The alliance with the global pharma major for research-based
 novel discovery not only provides attractive milestone and royalty
 payments but also enhances Orchids brand as an innovation-led
 organisation.
 
 The multi-pronged strategy of proprietary drug discovery, collaborative
 drug discovery and fee-for-service projects will ensure that the
 risk-reward equations inherent in the complex drug discovery processes
 are balanced for optimal value.
 
 CRAMS
 
 Apart from generics and proprietary discovery initiatives, we are also
 introducing our unique abilities of undertaking custom research and
 manufacturing services to select innovator companies. Orchid, with its
 world- class multi-therapeutic, R&D and manufacturing infrastructure
 and competencies covering the total spectrum of pharmaceutical value
 chain, is attractively positioned to undertake wide ranging development
 and manufacturing projects covering discovery, optimisation,
 pre-clinical, clinical and commercial supplies. Our strategy will be to
 work with fewer partners but on a broader and deeper spectrum to
 provide a total complement of products and services for such preferred
 partners.
 
 We are now at the cusp of the next growth phase, which will result in
 substantial business development and robust year-on-year growth across
 all our high-value verticals.
 
 I wish to take this opportunity to thank the shareholders and all our
 other stakeholders for their continued support to our growth plans.
 
 Regards,
 
 K Raghavendra Rao