Macquarie Research: Orchid Chemicals & Pharmaceuticals (OCP IN, Rs267, Not rated)

Orchid Chemicals & Pharmaceuticals
(OCP IN, Rs267, Not rated)
Key takeaways
􀂃 OCP is leader in high technology antibiotics: Cephalosporins, Penicillins / Betalactams and
Carbapenems. Management targets to grow topline by 15-20% YoY for the next 3-4 years and
expects strong operational cashflow going forward based on niche product opportunities.
Management believes that long-term contracts with Hospira / other innovators for supply of APIs
with assured capacity utilization is one of the biggest value drivers. Orchid expects to book
substantially more than US$100m in API sales to HSP in FY11, making up for the entire ~US$90m
revenue loss due to the sale of its injectable formulation franchise to Hospira (transaction closed
March 2010).
􀂃 Management believes that OCP has very strong integrated drug discovery capabilities with
proprietary NCE pipeline as well as custom research and collaborative drug discovery. Orchid
spends ~ US$ 7m in innovative R&D expense and the entire amount is expensed through the
P&L. OCP has also been targeting to work with Innovator pharma companies to contract
manufacture novel molecules in the cephalosporin space.
􀂃 Strengthening the oral formulation franchise: OCP has a pipeline of 36 (13 in Cephalosporins and
23 in NPNC space) ANDAs pending approval in the US, eight of which are first to file (FTF), and
OCP has settled three of them with the innovator. OCP expects the FTF products to add
significantly to its earnings momentum and the Desloratidine IR/ODT launch in 1H CY12 to be the
first FTF monetized.
􀂃 Robust FY11 guidance: Management highlighted that it is confident about posting strong doubledigit
growth YoY going forward, given its significantly deleveraged balance sheet and welldiversified
product basket. On the capex front, management expects to incur ~Rs1.5bn during
FY11 .Orchid expects its debtor days to reduce from 179 in FY2010 to around 120 by FY11. For
FY11, it has highlighted top-line guidance of Rs16bn and an EBITDA margin of 22%. It expects
the three pockets of FY11 growth to be:
1) The full-year impact of Tazo-Pip bulk sales (sold US$15m in six months in FY10 after
approval in September 2010. OCP is still the only player, with Sandoz the only other filer).
HSP currently has les than 30% market share given capacity issues.
2) Supply of carbapenem bulk to HSP for EU and US along with supply to one other partner for
regulated markets. These were absent in FY10 given lack of approval.
3) Orchid has acquired generic marketing firm Karalex Pharma to strengthen its front-end
presence in the US market. It expects the deal to add around US$10m to its topline in FY11.
Valuation
􀂃 Given US$290m in net debt, the stock is trading at ~10x FY11E EV/EBITDA, based on company
estimates.