Corrections or additions?

This article was prepared by Kathleen McGinn Spring for the March

9, 2005 issue of U.S. 1 Newspaper. All rights reserved.

When ‘Made in the USA’ Has Real Value

Apparently "Made in the USA" still has some value. While it is now

nigh unto impossible to find a sneaker, television, or a phone

legitimately carrying that sticker, and increasingly difficult to find

a sun dress or credenza made entirely on United States soil, there is

at least one industry where the moniker is worth something.

Medico, a young Hamilton-based pharmaceutical company specializing in

over-the-counter (OTC) remedies, finds that consumers in some of its

biggest markets, including Russia and Africa, and increasingly even

Western Europe, will pay more for cough syrup and similar products

that are made in the United States. Perceived quality and regulatory

standards are enough to make overseas customers open their wallets

wide enough to swallow a little more expense. This is one of the

reasons why the company, with facilities on Nottingham Way in Hamilton

and at Culbertson Avenue in Trenton, is quadrupling its revenues every

year and has just gone public to raise more cash for expansion.

Its products at first seem very familiar. They are, after all,

knock-offs of familiar brands like Tylenol, NyQuil, Robitussin, Scope,

and Vicks Vaporub. In English these products may carry a MediBest

label. Although they may not be exactly the same in every respect as

the trademarked items, they have the same active ingredients, and the

same high quality, taste, and appearance.

Medico was founded in 2001 by Kanneth Sugathan, who serves as its

president, and by Venkat Kakani, its vice president and general

manager. The two men met at the Sarva Dharma Service Center, an

interfaith spiritual and philanthropic organization to which they are

both deeply committed. A third active partner, Sunil Ambala, an MBA

and statistician who oversaw manufacturing operations, died recently.

The company is now looking for someone to take over his role.

Sugathan was born in Kerala, a region on the west coast of India that

describes itself as "God’s Own Country." The son of a chemist, he

earned a Ph.D. in organic chemistry from Kerala University in 1967. He

immigrated to the United States the next year on a two-year contract

with the Department of Agriculture as a research chemist. He did

post-doc work at the University of Mississippi and research for the

American Cancer Society before taking jobs with the chemical industry.

He moved to New Jersey in 1978, taking a job with Ziegler Chemical

before going to work for an industrial consulting company.

Working for a Brooklyn company, Polymer Research Company of America,

he led a teams of up to 18 chemists. The projects came from big

industrial companies with problems to solve or products to develop.

"It’s expensive to get a department to start or finish a product," he

says. So industrial giants often outsource the work. Working for a

client in short cycles, often three to six months, and never more than

nine months, he did everything from formulating or testing new

products to developing processes and solving problems.

The projects could involve rendering plastics soluble so that they

could be reused as lubricants, or improving coatings on industrial

products, or even improving appearances. "Anything where chemicals

were involved," says Sugathan. "I learned all of the techniques."

Lowering his already soft voice, he adds, "This is a secret: you learn

a lot more about a company when you work on a product. Everything you

do, you learn."

The knowledge would come in handy when he started his own company. But

he had no burning desire to become a business owner when he was

working on contracts for Polymer. "It was the best time of my life,"

he says, a broad smile emphasizing the point.

But he quit, without really knowing why. His wife quizzed him on his

reasons for leaving, worried that there had been problems on the job.

"I didn’t have an answer," he says. "I had just had enough." It turns

out, he continues, that providence may have been at work. "It turned

out to be the right time. She became sick soon after, and she needed

me."

Sugathan is vague about his impetus for starting a pharmaceutical

company. "The idea came from all sources," he says. It began to take

form as he and his Sarva Dharma friend, Kakani, talked. The two have

similar backgrounds and complementary skills.

Raised in the Andhrea section of India, the son of a farmer, Kakani

studied genetics in his homeland, and then went to work for a bank,

where he assessed industrial clients applying for loans. He then

immigrated to the United States, earning an MBA from Rutgers in 1991.

Immediately after graduating he took $25,000 in seed capital and

started a trading business, importing and exporting chemicals,

pharmaceuticals, and engineering items.

"We were working on the importing and exporting of pharmaceuticals,"

he says, "so I thought we might go into manufacturing. There is good

synergy."

Joining with Sugathan, he began to look for a location in 1998. A

Freehold resident, and the father of a nine-year-old daughter, he is

now looking for a home in Princeton, and says central New Jersey was

the logical place to site the new business. "This is the ideal place

for pharma," he says. "There is a large pool of technical people here,

and there is proximity to several multinational companies."

Sugathan, who recently moved from Piscataway to Lawrenceville, agrees.

The father of four grown children – including a doctor, a chemist, a

pharmaceutical industry employee, and a computer marketing executive –

all of whom live within an easy drive, he also has personal ties to

the area.

After narrowing their search for a facility to central New Jersey, it

took one year to find the location, a two-story 33,000 square-foot

space at 1000 Nottingham Way, just on the Hamilton side of the

Hamilton-Trenton border. The wait turned out to be worthwhile. "This

is the perfect spot," says Kakani, "because it was built to be a

pharmaceutical plant." The space was previously occupied by Elstim

Pharmaceuticals. The company has since added a 70,000 square-foot

manufacturing facility on Culbertson Street in Trenton, which operates

as Aum Nutra Pharm, a wholly owned subsidiary. Administration and the

formulation and manufacture of liquid products takes place in

Hamilton, while powders and capsules are manufactured in Trenton.

Start-up capital came from family and friends. The SBA guaranteed a

loan, but the company, which has 98 full-time employees and 100

seasonal employees, was unsuccessful in obtaining funding from the

state or the county, despite its fast growth. To feed that growth, the

company has just merged itself into a shell corporation, Satellite

Organizing Solutions, a portfolio company of New York-based Infinity

Capital, taking over its symbol, SOZG.PK (traded on the over the

counter bulletin board). Medico hired investment banking company

Berwyn Capital, of Berwyn, Pennsylvania, to put together the deal, and

paid for its ticker symbol and public status with stock. "It was

expensive," says Kakani, "but it was the best avenue to raise capital

without losing too much equity, and we thought we could withstand the

expense."

A table in the corner of Medico’s no-nonsense conference room is

chock-a-block with the boxes and bottles of OTC health aids that are

the engines of the company’s growth. A tall blue bottle stands out,

and demonstrates the myriad possibilities in selling over-the-counter

health aids.

"It’s like Scope," says Sugathan, fetching the container. Actually,

the bottle is shaped more like those that hold Listerine, but the

Caribbean-blue color of the liquid within does strongly suggest Scope

mouthwash. "We developed it for a doctors’ group," he says,

"1-800-Best DDS." And indeed that name is displayed prominently on the

label. "It’s like an advertisement for them," he says. Clever. Anyone

buying the mouthwash would have the group’s name in front of them – in

big letters – while gargling once or twice a day.

In formulating the mouthwash, Medico simply took the active

ingredients in Scope, clearly listed on its label, and went from

there.

"We start from scratch most of the time," says Sugathan. "The active

ingredient is written right there. We keep it as it is and formulate

to match the taste and the looks. We don’t match Scope; we build onto

it."

Sometimes clients come to Medico bearing a bottle, maybe of Robitussin

cough syrup or Afrin nasal spray. "They say ‘I want something like

this,’" recounts Sugathan. The company can comply, supplying

everything from formulation to manufacture to packaging, as it did for

the 1-800-Best-DDS group. But, to date, such orders make up only about

5 percent of the company’s business, although this is a prime growth

area.

Sugathan explains that most OTC medications are not covered by patents

and can be copied by anyone. "We have never come across one covered by

a patent," he says.

There are approximately 100,000 OTC drugs on the market, and Hollie

Gilroy, spokesperson for the Healthcare Institute of New Jersey, a

pharmaceutical trade group, says that many are former prescription

drugs that went off patent. "The only difference," she says, "is the

dosage." She gives Motrin as an example. Available not too long ago

only by prescription, it, and any number of copycats, are now sold in

newsstands and grocery stores everywhere.

Karen Mahoney, trade mission liaison for the FDA’s Center for Drug

Evaluation and Research, says, in an E-mail in response to questions

on how the FDA regulates these drugs, that the agency publishes

monographs listing active ingredients, allowed combinations, and

required labeling for each type of OTC drug. A manufacturer need only

comply with the monograph and produce the drug in a facility that

meets GMPs (good manufacturing procedures). There is no individual

testing process, as there is with prescription drugs. As for

oversight, Mahoney writes that the "FDA will go out and check samples.

It may only be one or two ingredients a year. Several products will be

tested."

A large potential business for Medico is providing private label

brands of OTC drugs to supermarket, drug store, and discount store

chains, and Sugathan says that his company is ramping up for it.

"We’re adding new high speed machines," he says. "We can now do 100

bottles an hour, but soon we will be able to do 400 bottles an hour."

"It will grow in the coming years," says Kakani of Medico’s private

label in-store sales in the United States. But meanwhile, 90 percent

of the company’s products are exported. Its aspirin, cough and cold

remedies, nasal sprays, ear drops, topical creams, and headache

remedies are sent overseas. Big customers so far are in Russia,

Lithuania, Belarus, and the Ukraine. From these former U.S.S.R. states

the OTC products move along to other Eastern European countries.

Medico has also found markets in Africa and is working on developing

customers in Holland, Germany, France, and other Western European

countries. Just back from a trade mission to Europe, Kakani is

optimistic about placing his products throughout the continent. OTC

products manufactured in the United States are more expensive than

those manufactured in cheap-labor countries, but this is one of the

increasingly rare cases in which cost is not a barrier to sales. "We

manufacture under FDA guidelines," says Sugathan. Overseas consumers

are willing to pay more for that guarantee, he says.

In addition to private label U.S. store products and exports, Medico

has its eye on at least two other major lines of business. The first

is contract work from large pharmaceuticals. So far it has not reeled

in any of this business, but it is set up to do so. The second is

original products, and the company is closing in on this profit

center.

One of its first original products is aimed at the growing population

of Type II diabetics. It is a nutritional supplement tablet wholly of

its own design. The company plans not only to manufacture the

nutriceutical, but also to package and market it. Still unnamed, the

product is now in market tests and could be ready for sale within

three months, says Sugathan. Other original products under development

or consideration include multi-vitamins and sleep products, including

remedies for snoring.

While its current products are distributed by others, Medico would be

responsible for getting its original products to the marketplace.

Kakani is aware that marketing to consumers is difficult and

expensive. Advertising expenses typically make up between 20 and 30

percent of the sale price of an OTC drug, as consumers cling to the

brands they know. But, he says, "it’s worth the effort."

Meanwhile, the company is doing a brisk business in turning out what

its website describes as "products equivalent to Robitussin, NyQuil,

DayQuil, Benadryl Elixir, Debrox, Vicks Vaporub…," being careful to

note that each of these names is trademarked. It is a long list, and

includes many household names.

Kakani says that his company’s products are "equivalent to or better

than" the brand names. Gilroy, the spokesperson for the Healthcare

Institute of New Jersey, explains that generic OTC drugs are the

"bioequivalents" of brand name OTCs: that is, their active ingredients

are the same. Inert ingredients, however, probably would not be the

same. "There is never a complete equivalent," says Gilroy.

While the exact composition of each of Medico’s OTC drugs differs

somewhat from its brand name counterpart, the containers in which they

travel are also somewhat different. And, in Kakani’s opinion, at least

equivalent. "How you present the package is important," he says. It’s

a huge part of OTC marketing, and Medico strives to do it better than

the big guys. The company has in-house marketers who come up with

concepts and designs for each product, but the actual graphics work is

outsourced.

While Medico is far from alone in striving to put these off-brand OTC

packages on more and more shelves, its liquid products do have an

easier time competing in the marketplace. "Anyone can manufacture

pills," declares Kakani. "Aspirin is easy. You just buy a machine and

pop them out!" Cough syrups and throat sprays are a different matter.

Formulating and manufacturing liquids calls for very substantial

expertise, says Kakani, as Sugathan, the chemist with some 40 years

experience, nods in agreement. "We have very few competitors in liquid

products," he says.

It turns out that making liquid OTC products is not only difficult,

but is also seasonal. Demand spikes in the winter cold and flu season,

and stores order ahead of peak sniffle season. Medico hires 100 people

to work from June through December to meet the increased demand. It is

working on products with year-round appeal, vitamins for example, to

extend work for these employees.

Kakani says the company has had no trouble finding manufacturing

employees, seasonal or permanent, and has had little trouble staffing

its other positions. It has snatched up some employees laid off by big

pharmaceuticals, including Johnson & Johnson, he says. Central New

Jersey is rich in chemists, marketers, and packaging design people.

The only jobs that are hard to fill, he says, are those in mechanical

engineering.

The fast-growing company expects to be up to 300 or 350 employees in

five years, and to have revenues of about "$100 million plus" by that

time, says Kakani. Revenues for 2003 were less than $900,000, and for

2004 were $4 million, a figure that is expected to grow to $16 million

in 2005. The company was "marginally profitable" in 2004. "We’re a

little ahead of the curve," he says. "Normally pharmaceuticals are

profitable in the fourth year. We’re about six months ahead."

Medico is fast outgrowing its two facilities, and will soon need more

space. The preference, says Kakani, is for more relatively small

buildings.

Both men work long hours, and make no time for golf or gardening.

Kakani spends as much time as he can with his wife, a physician who is

not now working outside of the home, and his daughter. Sugathan sees

his grown children and their families, including his four

grandchildren, often, and has dinner with the whole family at least

once a week. Any other spare time goes to their spiritual

organization, including work in area soup kitchens.

Medico’s founders believe that their work benefits the community too.

"Starting from three people, we now support 200 people," says Kakani.

"We’re helping the community by giving jobs. We’ve done a lot in the

past three years."

Medico Labs Inc. (SOZG), 1000 Nottingham Way, Hamilton

08619. Also at 2670 Culbertson Avenue, Trenton. Kanneth Sugathan,

president. 609-890-1999; fax, 609-588-0550. Home page:

www.medicolabsinc.com


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