Macquarie :: Orchid Pharmaceuticals- 3Q provides comfort for FY11 guidance

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Orchid Pharmaceuticals
3Q provides comfort for FY11 guidance
Event
 OCP reported 3Q FY11 sales of Rs4.8bn (up 33% YoY, 19% QoQ), EBITDA
of Rs1.3bn (up 76% YoY, 75% QoQ) and PAT of Rs566m (up 226% QoQ).
The EBITDA margin was 26.6%. Results were well ahead of our estimates.
 The key highlight is the margin expansion, which, according to management,
is sustainable at the current capacity utilization and product mix. We reiterate
our Outperform rating, with a revised target price of Rs415 (38% upside
potential) vs Rs395 previously.

Impact
 Significant margin expansion, driven by high-margin bulk supply: OCP
reported a 26.6% EBITDA margin on the back of increased supplies to
Hospira and the beginning of cefixime API supply under contract to a large
Japanese innovator. Management guided to sustaining margins, because of
the long-term profitable contracts. The 9M FY11 EBITDA margin was 23.4%.
 Hospira contract remains the main driver; contributed ~25% of sales:
Given the limited competition for the products under contract (carbapenem,
Tazo Pip and ADD-Vantage), we expect this to be a significant growth driver,
with EBITDA margin above 30%. The upcoming launch of Imipenem by HSP
and supply of bulk for Add Vantage device should further boost growth in
FY12, in our view.
 On track to meet FY11 guidance: OCP is on track to meet FY11 guidance
(net sales: US$350m, EBITDA margin: 22%, PAT: Rs1.4bn). For 9M FY11,
net sales were US$260m, EBITDA margin 23.4% and PAT Rs.96bn.
 Formulations business to contribute 50% of total revenue by FY13: The
formulations business contributes ~30% of sales currently. OCP expects
finished formulations to contribute ~50% of the top line by FY13. We expect
formulations to grow at a CAGR of more than 40% during FY10–13E, driven
by strengthened front end in the United States (Karalex acquisition), the tie-up
with Alvogen and FTF monetization.
 Asset turnover ratio to improve: Management guided for a 1:1 asset
turnover ratio by FY13 (~0.5:1 in FY10). Capex guidance for the next two
years is around Rs3.5bn, implying a very strong sales CAGR of ~ 25% for
FY10–13E (adjusting for sale of business to HSP).
Earnings and target price revision
 We raise our target price to Rs415 from Rs395, driven by the robust 3Q
earnings. We increase our FY11/12/13E core Rs16.2/21.6/25.7 from
Rs14.0/20.4 /24.5.
Price catalyst
 12-month price target: Rs415.00 based on a EV/EBITDA methodology.
 Catalyst: Imipenem and Cilastatin approval; strong quarterly results.
Action and recommendation
 Valuations are attractive, in our view, with OCP trading at a PER of 14x
FY12E diluted EPS, despite our estimated 26% EPS CAGR for FY11–13. We
maintain our Outperform rating and raise our target price to Rs415.