Orchid Chemicals and Pharmaceuticals

The Directors have pleasure in presenting the 16th Annual Report of
 your Company along with the audited statement of accounts for the
 financial year ended March 31, 2008. 
 
 The Report also includes the Managements Discussion and Analysis
 Report in accordance with the guidelines on Corporate Governance and
 the consolidated financial statements. The highlights of the financial
 results for 2007-08 are given below:
 
                                                       (Rs. lakhs)
 
 Particulars                                 Year ended      Year ended
                                         March 31, 2008  March 31, 2007
 
 
 Sales and operating income                 123891.62         91291.78
 
 Other income                                  124.20           155.98
 
 Total expenditure                           89408.95         63305.02
 
 Gross profit                                34606.87         28142.74
 
 Interest and finance charges                 8112.63          9830.65
 
 Gross profit after interest but 
 before depreciation and taxation            26494.24         18312.09
 
 Depreciation                                 9766.78          8246.73
 
 Profit from ordinary activities 
 before exceptional items                    16727.46         10065.36
 
 Exceptional item                             7126.67           993.83
 
 Profit before tax                           23854.13         11059.19 
 Provision for taxation
 
 - Current and deferred tax                   5250.52          1230.00 
 
 - Fringe benefit tax                          150.00           166.00 
 
 Profit after tax                            18453.61          9663.19 
 
 Add: Surplus brought forward                 4010.17          4519.18 
 
 Surplus available                           22463.78         14182.37 
 
 Appropriations:
 
 -Transfer to general reserve                12000.00          7000.00
 
 - Excess provision of dividend for 
 earlier year written back                   (1129.82)         (268.09)
 
 - Dividend                                   2936.99          2940.54
 
 - Tax on distributed profits                  499.14           499.74 
 
 Balance carried to balance
 sheet                                        8157.47          4010.18
 
 Performance
 
 During the year under review, your Company achieved a turnover and
 operating income of Rs. 1238.92 crore compared to Rs. 912.92 crore in
 2006- 07, registering a 35.7% increase.
 
 After providing for lower interest expenses of Rs. 81.13 crore (Rs.
 98.31 crore in the previous fiscal) and higher depreciation of Rs.
 97.67 crore (Rs. 82.47 crore in the previous fiscal), the profit before
 tax of the Company was Rs. 238.54 crore, compared to the previous
 years profit before tax of Rs. 110.59 crore, registering a 115.7%
 increase. Net profit after tax stood at Rs. 184.54 crore, compared to
 Rs. 96.63 crore in the previous fiscal, registering a 91% increase.
 
 Your Companys business comprising Active Pharmaceutical Ingredients
 (API), generic formulations and branded formulations continued to post
 steady growth. The Companys strategic shift from a bulk drug to a
 formulation-driven growth strategy, with focus on the regulated
 markets, continued to contribute to a significant improvement in
 turnover and profitability.
 
 Your Companys active pharmaceutical ingredients are increasingly being
 supplied to the Companys own generic formulations, representing an
 integrated pharmaceutical operation.
 
 Pharmaceuticals business
 
 Your Companys formulations business increased to Rs. 682.5 crore
 during the fiscal, compared to Rs. 385.74 crore in 2006-07. A large
 part of this business was contributed by the Regulated markets where
 the Company achieved a new watermark in the sales turnover.  The
 consolidated turnover of all the four divisions of the domestic
 formulations segment grew by 10% compared to the previous financial
 year to Rs. 74.94 crore. Your Company also sold Rs. 520.18 crore of
 active pharmaceutical ingredients (APIs) during the fiscal, compared to
 Rs. 511.21 crore in the previous fiscal.  This excludes the captive
 sale to the Companys formulations business.
 
 During the year, in the US generics market, your Company launched
 Cefepime Arginine, an injectable product for which your Company was the
 sole generic player throughout the year. This achievement is a
 reflection of your Companys unique IP, development and manufacturing
 capabilities. Your Company also launched another premium oral product,
 Cefdinir capsules in the US market. These two premium products of your
 Company continued to show steady growth in terms of sales and turnover.
 
 Your Company has also launched Cefadroxil capsules and Cefadroxil oral
 suspension range in the US generics market. The products already
 launched in the US continued to record a ramp- up of market volumes
 with a robust share of the overall revenue mix. Your Company is also
 set to foray into the European, Australian/New Zealand markets with its
 premium product Piperacillin /Tazobactam injections for which approvals
 are expected. Your Company is also making regulatory filings for its
 Carbapenem products for entry into the lucrative Carbapenem generics
 markets in the US and Europe.
 
 Dividend
 
 After transferring an amount of Rs. 120 crore to the General Reserve,
 your Directors recommend a 30% dividend (Rs. 3 per equity share of Rs.
 10 each) for the year ended March 31, 2008, subject to the approval of
 shareholders in the ensuing Annual General Meeting.
 
 Clarification on the market price of the shares
 
 On March 17, 2008, the stock price of your Company fell by about
 39.09%.  The sudden negative sentiment on the stock was due to a
 combination of macro factors and market rumours.  The trigger was the
 sale of certain shares of the Company held by a major multi-national
 liquidating its position in many companies, including your Companys,
 consequent to its own global issues. This together with the margin call
 on a portion of the promoters stock which was funded through
 borrowings led to the sharp fall in price. The stock price has since
 recovered significantly. Your Company reaffirms its strong fundamentals
 and the robust growth plans which are on track. Your Company believes
 that the rich pipeline of regulatory approvals and patent launches
 planned in the regulated markets will accelerate the overall business
 growth, and build value for shareholders.
 
 Regulatory filings and approvals
 
 Your Company achieved significant progress in the filing of DMFs (Drug
 Master Files) and ANDAs (Abbreviated New Drug Applications). As of May
 2008, your Company has filed 46 US DMFs and 47 ANDAs (28 in the
 cephalosporin segment, 16 in NPNC (non-penicillin, non-cephalosporin)
 segment and three in the Penicillin space) to support its US generics
 thrust. With 23 ANDAs for cephalosporin products already approved, the
 Company ranks the highest in terms of approval record in the
 antibiotics space.
 
 In the EU market, Orchid has increased its dossier registrations and
 marketing authorisations (MAs) to 18 (15 in cephalosporin segment, two
 in the NPNC and one in the Penicillin segments). Seven dossiers are
 also in the advanced stages of submission.
 
 The total count of ANDAs approved till date increased to 25, out of
 which 23 are in the cephalosporin segment and two in the NPNC segment.
 
 Continuing the track of international accreditations, your Companys
 sterile cephalosporin injections facility and the penicillin injections
 facility at Irungattukottai received the approvals of Medicines Control
 Council (MCC) of South Africa.
 
 Alliances
 
 During the year, your Company signed a new pan-European distribution
 agreement with a global injectable generics major for distributing
 seven of Orchids sterile cephalosporin products. Your Company also
 added new products and geographies to the alliance it has already with
 the generics major. Your Company also extended its marketing
 arrangement with a leading distribution major in the US to include 11
 additional oral non-antibiotic formulations for the US generic space.
 These new arrangements will pave the way for further utilization of the
 second sterile cephalosporin line and the new up-scaled NPNC commercial
 block.  With these arrangements, the number of products with exclusive
 distribution alliances increased to 52 in over 70 dosage forms for the
 US and 16 injectable products in over 20 dosage forms to Europe. Your
 Company has also entered into a supply agreement in the US for the
 distribution of Cephalexin capsules and dry syrups.  Your Company is
 also negotiating country-specific alliances for individual products for
 Europe, of which a few have already been entered into.
 
 During April 2008, your Company entered into a business alliance with
 Ranbaxy Laboratories Limited to explore and enter into specific
 collaboration agreements for multiple geographies and therapies in
 active pharmaceutical ingredients and finished dosage forms. This
 alliance would leverage the respective strengths of Orchid and Ranbaxy,
 benefiting business growth for both the companies. This alliance also
 establishes a framework for enhanced future co-operation between the
 two companies.
 
 Drug discovery
 
 The new drug discovery initiatives of the Company conducted through its
 wholly owned subsidiary in India, Orchid Research Laboratories Limited
 (ORLL) are progressing well. Continued efforts are being made for
 developing the identified lead molecules and potential back-up
 molecules in the therapeutic areas of anti-infective, anti
 -inflammation, anti-cancer and anti- diabetes drugs. New programmes in
 obesity and CNS / obesity are being evaluated. As part of the constant
 efforts to secure alliance opportunities, continuous networking and
 business development is being attempted.
 
 In the area of Custom Research and Manufacturing Services (CRAMS),
 certain agreements have been signed by ORLL and further discussions are
 going on for various potential projects.
 
 Bexel Pharmaceuticals, Inc., USA, has continued the phase 11(a) trials
 on its anti-diabetes molecule in Europe. The final results of the study
 are expected during the first quarter of fiscal 2008- 09.
 
 Awards
 
 During the year, your Companys wholly owned subsidiary, Orchid
 Research Laboratories Limited (ORLL) was conferred the Frost & Sullivan
 award for the Partner of Choice in contract research - collaborative
 drug discovery. This award recognizes the best Indian research and
 manufacturing services capability in the arena of Life Sciences and
 assesses their global competitiveness.  Conferment of this award on
 ORLL reconfirms the state-of-the-art infrastructure, processes and
 competencies that Orchid possesses.
 
 Mr K. Raghavendra Rao, Managing Director of your Company, was bestowed
 with Doctor of Letters (Honoris Causa) by the Thanjavur- based SASTRA
 University for his entrepreneurial achievements and contribution to the
 growth of the Indian pharmaceutical industry. He was also awarded the
 Alpha Distinguished Citizen Award for Entrepreneurship and Industry
 Leadership in the decennial celebrations of the Alpha Arts and Science
 College.
 
 Intellectual property
 
 During the year, Orchid continued to accelerate the IPR work on a
 number of products. The total number of patent applications filed by
 Orchid in various national and international patent offices was 551
 (including process, formulation, NCE, NDDS, biotech and nanotech
 areas). As of March 31, 2008, 246 patent applications have been
 published, while 82 patents have been granted cumulatively.
 
 Long-term resources FCCBs
 
 Out of the US$ 42.50 million raised by way of convertible bonds during
 2005- 06, FCCBs amounting to US$ 22.79 million have been so far
 converted into equity shares. The number of equity shares issued upon
 the conversion of the FCCBs is 42,00,903. Pursuant to the conversions,
 as of March 31, 2008, US$ 19.71 million FCCBs are outstanding. All the
 outstanding 92,50,000 GDRs issued and listed, have been converted into
 equity shares of the Company, by the GDR holders.
 
 Your Company has also raised US$ 175 million during February 2007 from
 the international markets through the issue of Foreign Currency
 Convertible Bonds (FCCBs). The zero-coupon convertible bonds have a
 tenure of five years and are convertible into equity shares at an
 initial conversion price of Rs. 348.335. The bonds are listed on the
 Singapore Stock Exchange. None of these bonds has been converted into
 equity shares of the Company till date.
 
 Issue of warrants
 
 The 50,00,000 warrants issued to promoter/promoter group(s) in March
 2007 are valid up to 18 months from the date of allotment (i.e. till
 August 31, 2008). The warrants are yet to be converted and as on March
 31, 2008 the warrants were outstanding.
 
 Employees stock option plan
 
 During the year, your Company has allotted 34,485 equity shares of Rs.
 10 each, pursuant to the exercise of options granted under the ORCHID
 - ESOP 1999 and ORCHID - ESOP 2005 schemes to the employees of the
 Company. The details of options granted to employees and the status of
 such options as on March 31, 2008, are given in Annexure VI to this
 Report.
 
 Your Company has also formulated a stock option plan viz., Orchid -
 ESOP 2007, for grant of 5,00,000 options to the employees of subsidiary
 companies either working in India or overseas, or a Director of the
 Company (excluding the Promoter Directors). The said scheme was
 approved by the shareholders at the Annual General Meeting held on July
 19, 2007. As of March 31, 2008, your Company has not granted any
 options under this scheme.
 
 Listing of equity shares
 
 Your Companys equity shares are presently listed on the National Stock
 Exchange of India Limited (NSE), Bombay Stock Exchange Limited (BSE)
 and the Madras Stock Exchange Limited (MSE). The Company has got
 listing approval from the above stock exchanges for the listing of
 34,485 equity shares issued during the year.  The convertible bonds
 issued during 2005-06 are listed on the Luxembourg Stock Exchange and
 the London Stock Exchange. The convertible bonds issued by the Company
 during 2006-07 are listed on the Singapore Stock Exchange.
 
 Overseas joint ventures
 
 NCPC Orchid Pharmaceuticals Company Limited, China: Your Companys
 50:50 joint venture in China, NCPC Orchid Pharmaceuticals, established
 for the manufacture of sterile cephalosporin APIs is progressing well.
 The joint venture is profitable with good sales turnover in the Chinese
 market. During the year under review, NCPC Orchid recorded a turnover
 of US$ 39.09 million. The Company has gained considerable share for its
 key injectable Cephalosporin API products in the Chinese market.
 
 Biotechnological Chemical
 
 Development Limited, United Kingdom: The joint venture was set up as a
 limited-time horizon project to develop and assimilate select peptide
 technologies. The joint venture company has been dissolved during the
 year. Your Company has already transferred the IP and assets of the
 joint venture to India.
 
 Subsidiaries
 
 Orchid Research Laboratories Limited, India (ORLL): ORLL has been
 developing its pipeline of new chemical entities (NCEs) in the fields
 of oncology, inflammation, diabetes and anti-infectives aggressively.
 ORLL has been conducting extensive pre-clinical studies of the lead
 molecules in the chosen therapeutic areas. It is also undertaking
 efforts to secure business alliances with pharmaceutical multinational
 corporations.
 
 Bexel Pharmaceuticals, Inc., USA (Bexel): The planned work on Bexels
 anti-diabetes molecule BLX-1002 upto phase ll(a) clinical studies has
 been completed. It was decided to carry out further work on other
 compounds through your Companys larger subsidiary ORLL at Chennai.
 ORLL has taken over the other ongoing programmes of Bexel and will move
 forward, based on relevant scientific and business considerations. In
 view of the residual clinical analysis work and out-licensing
 activities related to BLX- 1002, Bexel will continue to operate as a
 company with a small staff. These measures would sharply reduce the
 cost of overseas R&D expenditure hitherto incurred on Bexel. Orchid is
 also evaluating alternative options to leverage minimal infrastructure
 of Bexel for expert networking in newer areas of science. Consequent to
 this, the senior scientific and management team of Bexel has sought
 separation during the year. ORLL team is now overseeing Bexels
 developments.
 
 Orchid Pharmaceuticals, Inc., USA:
 
 Your Company established Orchid Pharmaceuticals Inc. in the Delaware
 State of the US as a 100% subsidiary company, to provide any identified
 services to Orchid through its wholly- owned subsidiary Orgenus
 
 Pharmaceuticals Inc. USA.
 
 Orchid Europe Limited, United Kingdom: Your Companys wholly owned
 subsidiary, Orchid Europe Limited, was incorporated to foray into the
 EU market. The Company provides regulatory support as well as business
 development support such as tie-ups / alliances with leading generic
 players in the EU market.
 
 Orchid Pharmaceuticals (South Africa) Pty Ltd., South Africa: Your
 Companys wholly owned subsidiary, Orchid Pharmaceuticals (South
 Africa) Pty Ltd., was incorporated to register and market bulk drugs
 and formulations in South Africa. Orchid has been successfully audited
 by MCC and has since received the approval for cephalosporin and
 penicillin injectable dosage form facilities. Your Company expects to
 launch the first cephalosporin antibiotic, Ceftazidime in the South
 African market during the current fiscal. Marketing and distribution
 alliances have also been firmed up for this purpose. The South African
 entity supports these activities.
 
 Orchid Pharma Japan K.K: During April 2008, your Company announced the
 planned formation of Orchid Pharma Japan K.K as a wholly owned
 subsidiary in Japan. Orchid Japan, headquartered in Tokyo, will drive
 Orchids foray into the high potential and growing Japanese generics
 market. It is expected that the Japanese generics market would grow at
 a rapid pace in the coming years, due to an increasing recognition of
 the need for quality generic medicines by the government and healthcare
 sectors. Your Company, with its comprehensive range of antibiotic and
 life style products, is ideally positioned to meet a broad spectrum of
 acute and chronic therapy needs of the growing Japanese healthcare
 market.
 
 During the year, your Company has commenced the process of dissolution
 of its subsidiary in Brazil viz., Ogna Farma. Your Companys another
 subsidiary in the USA viz., Gene Arrays Inc. was wound up during the
 year under review.
 
 Your Company had applied for an approval under Section 212(8) of the
 Companies Act, 1956 from the Department of Company Affairs, Ministry of
 Finance seeking exemption from attaching the Annual Reports of
 subsidiary companies with the Annual Report of Orchid and to provide
 the accounts in the same manner as certified by overseas auditors in
 the respective countries where the subsidiaries are situated. The
 statement as required under Section 212 has been prepared on the
 assumption that the Company would receive the approval and the same is
 given as part of this report.
 
 The consolidated financial statements of the subsidiaries duly audited
 are presented along with the accounts of your Company. The annual
 accounts of subsidiary companies are kept at the Companys registered
 office and also at the respective registered office of each of the
 subsidiaries for inspection and will be made available to the members
 seeking such information.
 
 Fixed deposits
 
 The Company has not accepted any fixed deposits and as such, no amount
 of principal or interest was outstanding as of the date.
 
 Directors Responsibility Statement
 
 In accordance with the provisions of Section 217 (2AA) of the Companies
 Act, 1956, your Directors confirm:
 
 - That in the preparation of the annual accounts for 2007-08, the
 applicable accounting standards were followed along with proper
 explanation relating to material departures, if any.
 
 - That the Directors selected such accounting policies and applied them
 consistently and made judgments and estimates that were reasonable and
 prudent, so as to give a true and fair view of the state of affairs of
 the Company at the end of the financial year (March 31, 2008) and of
 the profit or loss of the Company for that period (2007-08).
 
 - That the Directors took proper and sufficient care for the
 maintenance of adequate accounting records in accordance with the
 provisions of the Companies Act, 1956 for safeguarding the assets of
 the Company and for preventing and detecting fraud and other
 irregularities.
 
 - That the Directors prepared the annual accounts for 2007-08 on a
 going concern basis.
 
 Safety excellence journey
 
 Orchid has been committed to high standards of safety since its
 inception.
 
 Orchid in recent years embarked on a project called safety excellence
 journey covering all locations. The arrangement with DuPont who are the
 acclaimed global leader in safety has enabled Orchid to upgrade its
 safety performance further.
 
 Significant time, effort and resources are being invested in
 maintaining a safe work environment. Periodic training programmes on
 various aspects of operational safety are being conducted. It is also
 mandatory for all new employees joining Orchid to undergo a safety
 induction training programme. Various recommendations are implemented
 under the guidance of DuPont as per the project plan for achieving
 excellence in safety.
 
 Your Companys R&D centre at Sholinganallur was awarded the safety
 prize by the Tamil Nadu Government (Chief Inspectorate of Factories) in
 March 2008.
 
 To spread the awareness of safety among others, Orchid circulated a
 safety awareness guide (The Yellow Book) to all its stakeholders.
 
 Corporate social responsibility
 
 As a pharmaceutical company, your Companys desire is to extend beyond
 healthcare to alleviating hardship in the social and economic arenas.
 As a responsible member of the society, Orchid realizes that it cannot
 alienate itself from the eco-system and has to give back to the world
 what it takes through its industrial and business operations.  
 
 Your Company has recruited professionals with appropriate
 qualifications and experience to plan need-based community services.
 Your Company carries out its social responsibility with active employee
 participation on a philosophy of partnership with government
 organizations and NGOs.  Your Company has also established the Orchid
 Trust to undertake a variety of projects for the socially and
 economically deprived sections of people.
 
 Your Company was awarded the Good Green Governance Award 2007 in the
 manufacturing - non-metallurgical category, sponsored by Shrishti
 Publications and presented by Ms.  Sheila Dikshit, the Honorable Chief
 Minister of Delhi.
 
 Conservation of energy
 
 Your Company has always been striving hard in the field of energy
 conservation. Several measures to conserve energy and to reduce
 associated costs were taken during the fiscal under review as well. The
 particulars in respect of conservation of energy as required under
 Section 217 (1) (e) of the Companies Act, 1956, are given in Annexure I
 to this report.
 
 Foreign collaboration
 
 The particulars in respect of R&D/technology absorption as required
 under Section 217 (1)(e) of the Companies Act, 1956, are given in
 Annexure II to this report.
 
 Foreign exchange earnings and outgo
 
 The particulars in respect of foreign exchange earnings and outgo as
 required under Section 217 (1)(e)of the Companies Act, 1956, are given
 in Annexure III to this report.
 
 Particulars of employees
 
 Information as per Section 217(2A) of the Companies Act, 1956, read
 with the Companies (Particulars of Employees) Rules, 1975, forms part
 of this report and is given in Annexure IV to this report.
 
 Corporate governance
 
 The spirit of good corporate governance remains integral to the
 Companys corporate philosophy. The Company follows the Code of
 Corporate Governance issued by the stock exchanges for listed
 companies.  For 2007-08, all information relating to corporate
 governance is given in Annexure V to this report. A compliance
 certificate from the statutory auditors is appended to this report.
 General shareholders information is given in Annexure VII.
 
 Managements discussion and analysis report
 
 In accordance with the guidelines on corporate governance, the
 management discussion and analysis report is given in Annexure VIII.
 
 Directors
 
 Resignation of Dr Bishwajit Nag
 
 Dr Bishwajit Nag who has been a Director of Orchid since May 2003,
 resigned from the Board during February 2008. The Board places on
 record its appreciation for the contributions made by Dr Bishwajit Nag
 as Director.
 
 Retirement of Directors by rotation
 
 In accordance with the provisions of the Companies Act, 1956, and the
 Articles of Association of the Company, Shri R.Narayanan and Shri
 Deepak Vaidya retire by rotation at the ensuing Annual General Meeting
 and being eligible, offer themselves for re-appointment.
 
 Re-appointment of Dr C Bhaktavatsala Rao, Deputy Managing Director
 
 The five-year tenure of Dr C.  Bhaktavatsala Rao would be coming to an
 end on July 31, 2008 and your Directors felt it appropriate to re-
 appoint him for a further period of 5 years with effect from August 01,
 2008. The necessary resolution seeking the re-appointment of Dr C.
 Bhaktavatsala Rao as Deputy Managing Director of the Company and
 payment of remuneration to him has been included as an item in the
 notice of Annual General Meeting.
 
 Auditors
 
 The existing statutory auditors, M/s SNB Associates, Chartered
 Accountants, retire at the forthcoming Annual General Meeting and being
 eligible, offer themselves for re- appointment.
 
 Cost audit
 
 The Central Government has prescribed that an audit of the cost
 accounts maintained by the Company in respect of bulk drugs and
 formulations be conducted under Section 233B of the Companies Act,
 1956. Consequently, your Company has appointed Shri V Kalyanaraman,
 B.Sc, FICWA, as the Cost Auditor for 2007-08, with the consent of the
 
 Central Government, for the audit of cost accounts maintained by the
 Company in respect of both bulk drugs and formulations.
 
 Acknowledgements
 
 Your Directors are thankful to Bank of India, IDBI Limited, State Bank
 of India, Axis Bank Limited, Federal Bank, ICICI Bank Limited, Indian
 Bank, Union Bank of India, Allahabad Bank, Canara Bank, Punjab National
 Bank, Punjab & Sind Bank, Bank of Baroda and other public sector and
 private sector banks and institutions for meeting the long-term and
 working capital needs of the Companys expanding operations.
 
 The Directors are grateful to the Central and State Governments and the
 Central DCGI and State FDAs for their continued support to the
 Companys expansion plans. Your Board places on record its appreciation
 of the support provided by the customers, suppliers and equipment
 vendors of the Company. Your Directors are also thankful to the
 vendors, distributors and agents for their continued support.
 
 Your Directors are thankful to the esteemed shareholders and also to
 the holders of FCCBs and GDRs for their support and encouragement. The
 Directors acknowledge the commitment and contribution of all employees
 to the growth of the Company.
 
 
                               For and on behalf of the Board
 
 Place: Chennai                R. Narayanan
 Date : May 29, 2008           Chairman