The promoters of Shasun Chemicals and Drugs Limited, among the world's largest producers of ibuprofen, hand the reins to professionals. Venkatachari Jagannathan, interviews S Vimal Kumar, one of the co-promoters, to find out why

Chennai: Promoters divorcing themselves from daily management activities is becoming the norm at major corporate groups in the city. Taking a cue from this, the world's largest producer of ibuprofen, which also operates a global scale ranitidine plant, the 5,696-ton capacity Shasun Chemicals and Drugs Limited (SCDL) has hit the change button.

Inspired by the promoters of the Rs5,200 crore-turnover Murugappa group's strategy of distancing themselves from the day to day management by inducting professionals to run their organisation, SCDL too has decided to follow suit.

"From owners managing the business, we are now looking at managing the ownership. Now our primary function is to draw the future growth strategies and focus on maximising shareholder wealth," remarks S Vimal Kumar, finance director.

Kumar and his two brothers, Dr S.Devendra (managing director) and S Abhaya Kumar, (joint managing director) are the promoters of the Rs273 crore-turnover company.

SCDL also undertakes contract research for the pharma multinational, Eli Lilly. The Indian company has been chosen by Eli Lilly as a preferred supplier for three of its active pharmaceutical ingredients (API). In addition Eli Lilly has transferred the technology to SCDL to manufacture Cycloserine, an anti-tuberculosis drug for its global requirements.

Satisfied with SCDL's manufacturing success of hydroxypropylmethyl cellulose phthalate (HP MCP), an excipient or non-active ingredient of a drug, the US-based $5.8 billion-Eastman Chemical Inc, is strengthening its relations with the Indian company. Recently, the two companies signed an agreement to explore collaboration in the area of performance chemicals.

Were the contracts for MNCs like Eli Lilly and Glaxo related to its internal restructuring? Answers Kumar, "MNCs were not apprehensive about dealing with a family-managed company. They understand the Indian corporate set up. It is just that we wanted to look at growth opportunities."

According to him, owners managing the company have some disadvantages while negotiating contracts. "In our efforts to get a prestigious contract we might agree to wafer thin or even nil margin deals. But a professional manager with set targets will not enter into such deals."

With SCDL growing to a decent size, it is time for the promoters to look out for other opportunities so that the path for the second generation is smooth. The company is also on the lookout for experienced people to beef up its board. In April 2004, D A Prasanna, executive chairman, Manipal Education and Medical group besides joined the SCDL board, in addition to his charge as the CEO of Manipal Enterprises. Prasanna was earlier CEO, Wipro GE Medical Systems Limited, CEO, Wipro Health Science, chairman, Wipro Fluid Power and vice chairman of the Wipro board.

The signs of change are now evident in the company's 2003-04 annual report, which has been simplified and transparent though more exhaustive, like an analyst's report.
Speaking to domain-b.com, Kumar details the changes that are taking place at Shasun Chemicals and Drugs Limited and its future plans. Excerpts.

How do the three promoters plan to distance themselves from the daily management?
Though the three promoter-brothers are qualified professionals - I am a chartered accountant, Devendra is a qualified physician and Abhaya, a B.Tech - the tag of ownership is tied to us. As the business grew, down-the-line executives started getting three different signals from the three of us resulting in a bit of confusion.

To avoid this, we have formed a corporate management committee (CMC) in which the CEO, N Govindarajan, is a member along with the promoters. The CMC will arrive at decisions about strategy and vision. It is the CEOs responsibility to implement and propagate the decisions and vision. There will be only one voice, vision and direction for the whole company.

There is another committee consisting of the CEO and group heads, which looks after the daily operations. The CEO is responsible for corporate targets.

When did the promoters decide to implement the changes?
The transformation process started two years ago when the company started executing contracts for pharma MNCs in a serious way.

Did you seek external help in the change process?
The inspiration came from the restructuring of the Murugappa group. We are also seeking the expertise of a consultancy firm, which will design a performance appraisal system and an appropriate employee remuneration package. Performance targets for employees will also be designed.

Does this mean you and your brothers have distanced yourselves from the day to day management now?
Our focus has now changed to strategic planning and developing newer relationships. Most of the decisions are taken by professional managers in the marketing and finance departments. A strategic team headed by a vice president has been formed to look at inorganic growth. But it will take some time for us to fully divorce ourselves from the day-to-day management since many of our existing business partners prefer to deal directly with us. A year or two later the promoters will sport new designations. Perhaps, this will happen after we build our new corporate office near Chennai.

Many companies that were once into bulk drug manufacturing have now entered formulations. Do you have any such plans?
We have taken a conscious decision of not getting into formulations and avoid any conflict of interest with our existing clients. At present we undertake only contract manufacturing for clients in regulated markets like US and Europe. We find this business model working well.

One finds your sales mix is heavily dependent on ibuprofen, ranitidine and exports. Will entering the domestic formulations market help reduce your risk?
It is true that we are dependent on two products - ibuprofen and ranitidine, which along with exports, account for nearly 75 per cent of our turnover. In India we sell ibuprofen but not ranitidine as the cost involved in the quality processes makes our product a bit more expensive vis a vis domestic competition.

We would like to bring down our dependence on these two products to 50 per cent. This is possible by expanding our contract research and manufacturing services (CRAMS). Again the business for CRAMS has to come from overseas companies. But that doesn't mean that formulations is the only way out. We will continue our focus on our core competency.

The alternative is bio pharma products. We are in the process of setting up a bio pharma facility at an outlay of Rs8 crore. Streptokinase, the drug that we are developing to treat thrombolysis (dissolving blood clots), does not compete with any of our existing clients' products. The product will be ready by 2006. We will also get into medicinal plant research after setting up our R&D centre near Chennai.

How is the market for ibuprofen, its derivatives, ranitidine and nizatidine?
We hope to increase our market share in the US with Ibuprofen, the market for which is growing. We have added more customers there. There is no need for us to replace this product. Ibuprofen derivatives are exported to Europe. It is a high-value low-volume market. Last year we exported Rs10 crore worth of ibuprofen derivatives and we would like to grow the sales by 25 per cent this fiscal.

As for ranitidine, we supply the penultimate stage of the formulation to Glaxo and hope to earn Rs40 crore from it this year. On the other hand, the nizatidine market is slowing down due to the cost factor. We expect the demand to peak this year and then start tapering. We hope is to export Rs45 crore worth of this in the current year.

What is the business potential from Eli Lilly's cycloserine the anti tuberculosis drug?
It is an old anti-tuberculosis drug. But it is working wonders in AIDS patients suffering from tuberculosis. Eli Lilly has transferred the technology to us. Trial production has started and commercial supplies will start next year. The business potential will be around $6 million by 2006.

About your CRAMS business….
We do contract research, custom synthesis and our own product development. Currently we are doing contract research for many companies including Eli Lilly. We have started marketing our research capabilities in Europe and we are confident of getting some contracts there. In the US, Austin Chemicals does the marketing on our behalf.

Could you tell us about your on going capex projects?
The Rs40 crore-formulations plant at Pondicherry and the Cuddalore facility effluent treatment plant will be over by next year. Construction work at our R&D facility is on and the first lab will be ready this October while the entire lab facilities will be ready next year. In the second phase we will construct our corporate office. The total investments for all these projects will be around Rs85 crore and Rs40 crore will be funded by debt. Our debt levels are very low.

Like other Indian pharma companies who are setting up manufacturing plants in China, do you also have any plans for China?
Presently 80 per cent of our raw materials come from China. We are looking for sourcing three critical raw materials from China and are in favour of strategic ties. It could be a joint venture or contract manufacturing deal. We have identified a couple of plans in China and are exploring the possibility of sourcing our raw materials.