Anu Raghunathan
When C.C. Paarthipan, a first-gen pharma entrepreneur, listed his tiny Chennai company, Caplin Point Labs–with revenues of less than $1 million–it was oversubscribed 117 times.
He raised about $900,000 in the 1994 IPO and deployed it in a formulations plant in Pondicherry. But in just a few years the company got mired in quality-control issues; consignments were rejected, and it became a penny stock. “I couldn’t pay my sons’ school fees–my company had become a nonperforming asset,” recalls Paarthipan, 62. “That’s when I took the risk of going to places where most people fear to go.”
He packed his bags and left for Africa and then Latin America. He braved the weather, the food, guns, drug lords and competitors to set up a base. He networked with importers and pharmacies to forge deals in these semiregulated markets, which lack the stringency of the U.S. market.
The early move to Latin America has differentiated Caplin because small Indian pharmas that choose to export typically go to proximate regions in Southeast Asia, central Asia or the Middle East. But then those markets get crowded pretty quickly. Paarthipan saw Latin America as the Goldilocks spot–too small for big pharma players and too far-off and risky for small players. The move has paid off.
Revenues have grown from $18 million in fiscal 2011 to $40 million in fiscal 2015, while net profits rose from $1.4 million to $6.5 million in the same period. This has earned Caplin a spot on FORBES ASIA’s Best Under A Billion list for two successive years. Investors have taken note. The stock has risen 44% in the past year, taking the market cap to $206 million. (Paarthipan, who along with his family now owns 68% of the company–up from 59% last year–is worth $140 million.)
The company sells ointments, injections and generic pills across 3,500 pharmacies in Central America. It gets 90% of its revenues from this region. And it’s looking to grow from 7 Latin American countries to 12 in the next two years. Product registrations are expected to jump from 1,700 to 2,200. Also in the pipeline: a move to regulated markets like the U.S. To this end Caplin has set up a $15 million “sterile injectable” plant outside Chennai.
“We have comfortable cash flow, reasonable profits and a business based on advance payments for exports,” points out Paarthipan. “This is a rarity for a company of our size.” It’s allowed for $32 million in capacity builds in the last few years with minimal debt.
It was a long haul from the village of Pooavalambedu outside Chennai to the pharmacies of Latin America. The son of a farmer, Paarthipan studied in a Tamil-language school. After college a string of odd jobs culminated in his becoming a pharma company rep. In 1985 he started making protein tonics himself, then generics as he set up Caplin Point (which stands for “CAPsules, Liquid INjections, Powders, OINtments and Tablets”) Labs with four partners in 1990. (They exited management in 2006 and later sold out.)
Caplin started off by manufacturing creams and ointments. All was well until the quality issues crept up in 1997-98. That led to a decade pursuing markets abroad. “I had to struggle a lot,” says Paarthipan. “It hasn’t come on a platter.”
Even today the issue of physical safety is always at the back of his mind. He recalls arriving in war-torn Somalia and being robbed at gunpoint in Angola. (The company still has 10% of its business in Africa.) However, the Paarthipans have gotten adept at living and working in Latin America. The founder’s first son, Ashok, 33, heads the business there. He moved there in 2003, lives in Guatemala and is married to a Guatemalan.
Ashok travels 20 days a month between countries applying for tenders, clinching supply deals and completing product registrations. He’s assisted by 35 executives–mostly hired from villages in and around where Paarthipan grew up. They were trained in Spanish before being sent. “The boy who used to bring me tea in Chennai is now a manager in Ecuador,” says Paarthipan.
In Latin America Caplin executives travel in bulletproof 4×4 cars. They steer clear of discos and dangerous neighborhoods. Ashok has his own rule of thumb: “You can see a gangster from a mile [away],” he says. “If you are ever confronted, you must give away whatever you have on you.”
Over the years the Latin American business has grown to nearly 400 items–from vitamin gummy bears to antibiotics to cardiovascular medicines. “It has a lot to do with living here for the last 12 years,” says Ashok, who has an undergraduate degree in marketing and business administration from Middlesex University in London. “It has to do with the relationships that have been built over time. I can tell the local distributor that I am the founder’s son and I can vouch for the quality.”
Customers at a pharmacy in Managua, Nicaragua, one of Caplin’s territories. Credit: Inti Ocon/Archivolatino
From the time the senior Paarthipan first hit the Dominican Republic in 2003 and then Guatemala in 2005, Caplin has been pliant on matters like product sizes, which the market wants small. Ashok in the region takes direction on product mix, and while he files for registrations, his father and younger brother Vivek handle the manufacturing end. Increasingly, Caplin does its own distribution.
“The company’s performance has been very consistent,” says Amey Chalke, pharma research analyst at Mumbai’s Motilal Oswal. “The return on capital employed is at 67%. Typically, 25% is considered good in the industry. They are also looking to enter the sterile injectable space, which will fetch them high margins.”
To counter investor concerns that it sells in unregulated markets where there’s no reliable data on key players or market shares, Caplin put out a detailed annual report last year outlining the Latin American pharma market, estimated at $80 billion in 2014.
Paarthipan says that even deep-pocketed competitors would be challenged to eat into Caplin’s share because the product registrations take several months. Also bigger players do branding while Caplin’s products are plain vanilla generics.
Even though he manages six pharmacies, he’s not interested in setting up physical pharmacies. “When you open a chain of 100 pharmacies, you’ll put 100 people out of business and you’ll antagonize 100 people,” he says. “Again and again I will be attracting physical risk. I don’t want that.”
Nearly half of Caplin’s revenue comes from outsourced meds. It has contracted with Chinese manufacturers for cephalosporin and penicillin, which it then sells in Latin America. “We’ll never be able to compete with the Chinese in the unregulated markets,” says 31-year-old Vivek, who is the chief operating officer. “But the top Chinese manufacturers have massive capacities. So we tap into their spare capacity.”
Vivek, fluent in Mandarin, went to China in 2005 after getting an undergraduate degree in biotechnology from Monash University in Australia. He tied up with large Chinese manufacturers and also set up a quality control lab in Shijiazhuang. Now he travels there every quarter to oversee the operation.
His father, meanwhile, is trying to break out of his comfort zone. A bookish sort , Paarthipan says an early interest in communism led him to a “pro-poor” approach. His business model in Latin America entails selling to the bottom of the pyramid. But the next phase looks to premium products. The injectable plant has received approvals from Brazil and the European Union. Caplin has inked deals with major Western pharmas. “Sterile injectables is a big boys’ domain,” Paarthipan says. “We have identified specialty products that we’ll be focusing on.”
Caplin could enter the U.S. by 2019-20. Until then Latin America will continue to be the cash cow–with a potential scale-up to $150 million.
That’s heady stuff but, to the founder, not like past hazards. “The rough-and-tumble atmosphere is over,” he says. “The physical risk and the blind-risk part is over. Now it’ll be more of intelligent risks.”