Entrepreneur of the Year

Sudhir Pai J

A New Dimension to BioServices

Sudhir Pai J, managing director and CEO, Lotus Labs, is 37 years something. Nonetheless, he has become the connoisseur of the CRO business. He built an organization, which grew from Rs 2 crore in 2001 to Rs 26.5 crore in 2004 and struck a record acquisition deal.

He is a man who means business. A person who has strong affinity to numbers. His business acumen and entrepreneurial drive has seen Bangalore-based Lotus Labs catapult to a company of international repute. In what was termed as the largest and first-ever acquisition in the contract research organization (CRO) segment, Lotus Labs was acquired by Iceland–based Actavis, a $750 million generic pharmaceutical company, in a Euro 20 million ($25.52 m) deal early this year. Sudhir Pai J had a hand in negotiating the deal, for consideration 12 times EBIDTA, which is far above the industry average of 8 followed in Europe and the US for unlisted companies. Lotus is now a 100 percent subsidiary of Actavis and is engaged in clinical trials and pharmaceutical research.

Starting off as a management consultant with AF Ferguson & Co (AFF) in 1992-93 to heading one of the leading CROs in the country, Sudhir Pai has indeed come a long way.

"AFF was the largest accounting and management consulting firm in India those days. They were part of KPMG, one of the big four consulting firms in the world," recalled Pai. "My work included preparation of project reports, organizational restructuring, FERA consulting and market surveys," he elaborated. Prior to joining AFF, Pai did his articleship with Amarnath Kamath & Co., a reputed audit firm, in Bangalore. He worked in the areas of statutory audits, investigational audits, stock audits, concurrent audits, bank audits, project reports and rehabilitation reports for small and medium scale companies during his articleship between 1989 and 1992.

"After a brief stint with AFF, I joined Eros Pharma Ltd, a South India-based pharmaceutical formulations company, as finance manager in 1993," said Sudhir Pai.

Eros was the first ISO 9001 certified pharmaceutical company with operations in South India and exports to several unregulated markets. It was ranked 65 in ORG rankings and was acquired by Micro Labs Ltd, a Bangalore-based pharmaceutical company, in 2002.

The company recorded a turnover of Rs 22 crore for the year ended 2002.

"I started my career as a finance manager and rose to the position of director (finance and marketing) in 1999. The company started seeing growth levels of 15-18 percent from 8-10 percent per year. In the year of acquisition, it showed the highest growth of 22 percent and about 30 percent post acquisition," he said. Eros became a zero debt company in 1997 and was categorized as health code "A" company by its bankers Canara Bank.

"During my tenure at Eros, I was mainly responsible for implementing robust financial systems, IT systems and management reporting systems. I was responsible for tightening the working capital norms and reducing debtors and inventory to optimal levels. From the promoters' side I was entrusted the responsibility of negotiating the deal with Micro Labs valued at 15 times the EBIDTA which was remarkable for an unlisted small sized company," Pai says with a sense of pride.

Being part of the erstwhile promoter group, Sudhir Pai joined Lotus full time in 2002 as executive director and was promoted as managing director and CEO of the company.

"My rapport with the promoters of Eros Pharma was very good. When we started Lotus, I never felt I was going out of the company and starting something on my own. My association with Eros is such that I was running the company for five years and I felt the company was my own. The entrepreneurial mindset was already there from 1997-98. I became a director, started taking decisions on my own even though I was not owning the company. That was one of reasons why the transition was very easy for me. It was a big risk at that time. I remember meeting representatives of BioSpectrum in Bio 2003 and advertisements were sought. I was not in a position to offer anything at that time. In the sense, we were so small, we were not sure of media publicity. At that time, we were still trying to make ends meet. Finally, things turned out to be good. Things happened at the right time for us and we got some very good people," he stated.

On the challenges he faced after his shift to the new company (Lotus), Pai said, "We started with a 6,000 sft facility with about 26 beds and within two months we realized we were full. But we did not stop at that. We felt the need to expand and get more people into our fold. At that time, skilled people were difficult to get. We decided to start a unit in Bangalore as we felt we could control it if it were to be based in Bangalore. We realized we had to train people and make them responsible for their units. We started looking at getting fresh people and training them and putting them in these units. We wanted to reach global standards of quality."

As a promoter, "My concentration was on the financial and business part. The first and foremost thing was to get more clients. When I joined Lotus full time, we had only two clients doing all 100 percent of the business. We had to broadbase our clientele. Now we do not have even one client that accounts for 11 percent of the business. My focus was on getting things in order and taking care of the administration. Even infrastructural requirements have been my domain. We were conscious of the fact that there was a need to improve our foreign clientele because we knew that foreign clients would give us more money. What we would get from them would be 60 percent of what they would be paying in the US and that would be double of what we normally charge Indian clients. So that is where we really had to pitch ourselves. Today, we have 10 foreign clients who are contributing quite a lot of business for us."

Another major challenge for Pai was managing people. "When I moved to Lotus, the change I could make out from my previous company was that the type of people we had at Eros was different. At Lotus, we have all educated people. We have skilled scientists and doctors. So ego management was topmost in my mind. Doctors have their own mindset and feelings. It is actually difficult to bring in a doctor from a clinic or a hospital into a CRO. We need to ensure that the doctors are kept happy and make them feel good. That was one thing. On the lab side, we have PhDs, scientists and scientific people and they have their own ways of working. I'm a commercial man and at the end of the month, I have to drive my numbers. But a scientific person has his own ways and I had to ensure that everything is put together and gels well. This is a big challenge. Today, I feel nice that I could manage all this. People management was a real challenge. Even when it comes to clients, I would be talking to R&D chiefs of companies or managing directors. Because everything depends on bioequivalence study report for them. If your study fails, that means in some ways you are telling that your formulation is not very good. So you are again touching their egos. You have to talk to them nicely so that they give us more projects. So we have to work along these lines very well from a business point of view. So it was a real challenge for us. In the previous company, if one doctor did not want our product, another doctor would. So it was not that I had to please him all the time. Here it is a small industry. If one company feels that Lotus is not good, it would tend to tell the other companies and nobody will give you work. So these are the issues we had to deal with. That is something I learnt and I was really focused on," Pai said.

How did he make happen the Actavis deal? "Lotus has been a target for many companies to strike a concrete business alliance. What started as an alliance turned into an acquisition only because Actavis gauged the potential of Lotus Labs' ability in bioequivalence studies for its product development and contract manufacturing programs. It started somewhere in September last year when Actavis came in as one of our clients. I really cannot say whether the company had acquisition in mind at that time. Representatives of Actavis started talking to us even before the first project started. Normally, there is an audit process before any study is given. An audit team visits our facility and confirms and only then a study is given. As soon as the audit process was complete, we had a visit from the business group of Actavis. This was the merger and acquisition (M&A) group and they initiated talks on whether we would be interested to have a strategic investor. That is how the whole thing started. And I met them again in December when I went to Europe. At that time, Actavis was keen on starting something fast or tying up with some kind of strategic investment. They also came for a kind of a takeover scenario. I must admit that there were four bidders at that time. When Actavis came, three other companies were also interested in strategic investments. One was a large Indian group with interest in the pharmaceutical sector. Another company was from Europe and the third one was from the US. They were talking to me simultaneously and one of the companies was still going through an audit process. At the end of it, there were two companies-one was of course Actavis and the other company was from Europe. The offer was made in February by Actavis and there were negotiations further till about two or three weeks. Finally in March we closed the deal."

The advisor of the buyout was Ernst & Young. The buyout provided Lotus Labs a dynamic entry into a rapidly expanding clinical research global market. Actavis which is listed in the Icelandic Stock Exchange has a significant presence in the regulated regions and this gave the much-needed fillip for Lotus Labs to enhance its exposure in the global market based on its expertise in having conducted over 500 bioequivalence studies and clinical trials in the areas of Phase I and Phase III for clients across the globe.

Disclosing how he managed to get the evaluation, Pai said, "We were not in a hurry to sell. That was a major plus we had. When we negotiate, we need to have some strengths. We should be in a position to reject the deal. If you are in a hurry to sell or desperate to sell, then you get cornered. And we had two companies already. We had a fantastic track record of growth and profitability. We could have waited for one more year and probably we could have got better evaluation. Actavis came to us and that was the most important major strength to negotiate. For any generic company, early presence in the market is very important and with Lotus, Actavis can dictate in terms of timelines."

Speaking on the work culture at Lotus, Pai said, "The company is driven by people and we felt we have to give it to our people. Our timings are flexible and we have a five-day week. A person even in the remotest corner of Lotus is made to feel important and responsible for all that happens to each and every study. Salary is not everything. The employees have to feel that the company is their own and should have a sense of belonging. This is the kind of culture we have brought in."

Post acquisition, "I'm no longer an entrepreneur in the real sense but I continue to be responsible for all the operations here. Whatever has changed has been for the good," said Pai, a Mangalorean who has been in Bangalore from the age of one. His father Panduranga Pai was in the transport business and mother Vilasini Pai has always been a housewife. His sister is a lecturer in a college in Bangalore and his brother-in-law a doctor. His wife, Sheetal Pai, is from Mumbai and she's a housewife. "We have a 6-year-old son, Rohan Pai. I used to be a very good cricketer and was the captain of my school team. I've played with Anil Kumble and Venkatesh Prasad while I was a student of National High School and Vijaya College respectively. Now I just watch them play!"

Being a finance man, my interest is in the stock market. I travel a lot and have been to France, the UK, Japan, Germany, Belgium, Hungary for business development and established reasonably good contacts in the pharmaceutical industry globally." And he draws his business inspiration from the principles of JRD Tata and Infosys chief NR Narayana Murthy and considers them his role models.

Namratha Jagtap with Ch. Srinivas Rao

"Our main goal was to increase business and grow 100% every year."

How was Lotus Labs formed?

The idea of floating Lotus came from one of the ex-managing directors during 1995-96 when we did a bioequivalence study for one of our (Eros) products. We then started looking at the possibility of bioequivalence studies for the US generic bioproducts. We profiled a couple of companies and also looked at some, which were doing work for Indian submissions. We visited them and found that the quality was a lot to be desired which made us think that we could do a lot better.

We (Lotus) started with a 6,000 sq-ft facility with about 26 beds and within two months we realized we were full. But we did not stop at that. We felt the need to expand and get more people into our fold. At that time, skilled people were difficult to get.

We decided to start a unit in Bangalore as we felt we could control it if it were to be based in Bangalore. We realized we had to train people and make them responsible for their units.

Were you convinced about the potential in this area in 2000?

We had heard about a few companies like Vimta being there for 20 years but we were not sure how good their business was in bioequivalence studies at that time. It is only now that we are seeing the generic market.

In the first year when we started, we thought we would do 24 studies and we ended up doing 48 studies! In the second year, the number doubled and the following year we did about 110 studies. We have now completed over 650 studies. Correspondingly, each year we have doubled our turnover.

It was very important for us to ramp up our capacities. From 26 beds in 2000, we grew to about 100 beds in 2002 and now have 210 beds. In the next six months, we are going to have 300 beds. We had one machine when we started and now we have 6 and two more are on their way. So there has been a huge leap and we've grown 10 times in terms of beds and in terms of machines. And we still feel we do not have enough.

How did you expand your business?

Lotus Labs tied up with St John's Medical College, Bangalore to set up a drug trials facility in the college campus and the company received a venture funding of about Rs 5 crore which helped in our expansion plans. One of our promoters, Dr Ranganath Naik, who was the chief of cardiology at Wockhardt, was associated with St John's for a very long time and it was because of his contacts that we could get a tie-up going.

The facility has a drug trials centre to conduct bioequivalence and bioavailability studies. Lotus Labs is the first clinical research organization in the country engaged in Phase 3 and Phase 4 trials and the fourth in the world engaged in such trials.

We realized we had to bring in professional management if we had to expand business as these are all scientific operations and people with a scientific bent of mind would not be commercially pushy enough to expand the business. We felt the need to get more trained people and that's how we started one more unit in Bangalore and then another in Chennai.

Our main goal was to increase business and grow 100 percent every year. We ensured that we got enough turnover profit and recognition to expand our clientele as well. The foremost challenge we had was to ensure that we maintained quality.

For a year-and-a-half, we were working for only two companies in India-Ranbaxy and Dr Reddy's. And then we started looking at other clients. Today we have 30 clients-10 from outside India and all these companies have audited us. We have also been audited by consultants from the USFDA. They were of the view that we are on par with or even better than what an US company can offer today in terms of facilities or the work. I think we have reached a stage where we can say we are one of the top international companies today and I'm definitely very proud to say that the team here has really contributed towards achieving this.