Orchid --Visible growth:: Macquarie Research,

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Orchid
Visible growth
Event
 OCP is a vertically integrated global pharmaceutical company
with operations mainly in Cephlosporins, penicillins/betalactam and
Carbapenems. OCP employs more than 4,000 people, of which over 700
are scientists, technologists and other professionals. It is the largest
manufacturer-exporter of cephalosporin products in India and a leader in
penicillins/betalactam and carbapenems. It has strength in molecular
modelling, medicinal chemistry, analytical chemistry and process R&D. Its
long-term exclusive agreement with Hospira to supply APIs will be a key
growth driver, according to management.

Impact
 Hospira contract remains the main driver; contributes ~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 supplying the bulk of Add Vantage devices should further boost growth in
FY12, in our view.
 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
a 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).
 Cash from asset sale helped deleverage: OCP used the US$400m cash
received to pay down Rs14bn of high-interest debt, thereby lowering the
debt/equity ratio to 1.4x from 4.6x. Aided by strong free cashflow generation
(~US$100m over the next three years), the balance sheet should further
strengthen.Price catalyst
 12-month price target: Rs415.00 based on an 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 13x
FY12E diluted EPS, despite our estimated 26% EPS CAGR for FY11–13.
We maintain our Outperform rating and target price to Rs415.


Orchid Aide Memoire
1. What percentage of the total business is the Hospira contract? Going forward, what would be the contribution? What is the
EBITDA margin made by OCP in the contract?
2. When do you expect Imipenem and Cilastin approval?
3. Can you explain the competitive scenario on Tazopip (Hospira contract)?
4. How much will your Formulation business contribute to the topline in FY12 & FY13?
5. Update on key ANDA approvals in US? What would be the total market size of the ANDA pipeline
6. What is the current net Cash?
7. Future capex plan?
8. Outlook for the Bulk (ex-hospira) business from 2-3 years perspective?
9. Any acquisition plans in near future?
10. Update on the NCE/NBE pipeline? Key molecules/products in pipeline?
11. What is the current R&D expense as % of sales? FY11, FY12 &FY13 guidance in terms of % of sales?