An Over-The-Counter Affair

Ask a Russian about India, and she will most probably rattle off the following: Raj Kapoor's films, Tata Coffee's Mysore Gold, and cough and cold herbal drugs Rinza and Doktor Mom. Soon, Rinza and Doktor Mom will disappear from that list. On 23 May, Doktor Mom's manufacturer – Mumbai-based JB Chemicals & Pharmaceuticals — decided to sell its over-the-counter (OTC) business in Russia and Commonwealth of Independent States (CIS) to Cilag GmbH International, a wholly owned subsidiary of Johnson & Johnson (J&J) for more than Rs 1,160 crore. The deal includes sale of worldwide rights of Rinza — the market leader — and Doktor Mom, the second-largest, cough-and-cold brand in Russia. Following the move, the company's share price plunged 18 per cent on bourses on 24 May.

The business is worth close to Rs 300 crore, which six-decade-old JB Chem built over the past two decades. The deal will shave off nearly 30 per cent of JB Chem's Rs 871-crore turnover and reduce operating margins by over 3-5 per cent in 2011-12. "We realised it was difficult to take the OTC business in Russia to the next level as it needs huge investment. We had to spend over $12 million on advertising on Russian TV during last year alone, which affected profitability," says Pranabh Mody, president and whole-time director of JB Chemicals.

The company plans to strengthen its Rs 300-crore domestic business in coming years with new product acquisitions and in-licensed products. "The domestic business is growing at over 15 per cent per annum and we hope to perform better than that in the coming years," says Mody. The immediate goal is to hike the number of medical representatives from 800 to 1,500 by 2012. Already 100 have been added to a new division selling prescription drugs in dentistry and gynaecology. The deal also marks JB Chem's entry into contract manufacturing in a big way. It will continue to supply finished dosages of the sold products — a dozen — from its manufacturing facilities for the next five years, ensuring steady revenues of $15-20 million every year.

Currently, JB Chem's contract manufacturing business is worth only $10 million that it earns from certain service contracts and its works for a few firms in South Africa. "We are also hopeful of getting more contract manufacturing orders from J&J and will also target such alliances with other generic players," says Mody.

Initially, the plan is to confine contract manufacturing aspirations to lozenges and injectables — an area of core competency for JB Chem. The firm can meet additional orders by employing more shifts at the three existing units. It also plans to start a new unit at a special economic zone (SEZ), where the company owns land. Within the next two years, JB Chem is hopeful of garnering 35 per cent of total revenues from contract manufacturing, a business with 15-20 per cent normal margins.

Even though it has sold Doktor Mom and Rinza, JB Chem will not desert the Russian region altogether. After all, it was earning over 45 per cent revenues from there. Its prescription business in the region is worth $23 million, and it hopes to scale up in that market, which is growing at a compounded annual growth rate of over 13 per cent. "We will also look at buying marketing front ends in rest of the world markets," says Mody. He is hopeful of finalising a master plan for investments within the next six months.

(This story was published in Businessworld Issue Dated 06-06-2011)