Macquarie Research, Orchid Pharmaceuticals- Roadshow Takeaways :target price of Rs415.

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Orchid Pharmaceuticals
Roadshow Takeaways
Event
 We present key takeaways from the recently concluded non-deal road-show
where we hosted a meeting with senior management of OCP for over 40
investors. We found interest among investors high given the emerging visibility
of earnings driven by product-specific contracts with Hospira and other players
across geographies. Financing for FCCB redemption in FY12 was one of the
primary concerns highlighted by investors.

Impact
 Hospira contract remains the key driver medium term: Given the limited
competition for the products under contract (carbapenem, Tazo-Pip and ADDVantage),
management expects 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. We expect the HSP contract to contribute 25% of FY12 top line.
 Novel Cephalosporin supply: OCP has a long-term contract with an
innovative US-based player for supply of a novel Cephalosporin product.
Given the recent US launch of the product, the supply has now started. We
estimate this contract will add ~US$25m to the top line in FY12 at attractive
margins.
 On track to beat FY11 guidance: OCP is on track to beat FY11 guidance
(net sales: US$350m, EBITDA margin: 22%, PAT: Rs1.4bn). We see upside
risk to our FY11 estimates (net sales: US$367m, EBITDA margin: 23.5%,
PAT: Rs1.4bn), given the beginning of supply of novel cephalosporin (our
estimate was 1QFY12) and strong traction in HSP supply. For 9M FY11, net
sales were US$260m, EBITDA margin 23.4% and PAT Rs0.96bn.
 Asset turnover ratio to improve: Management is guiding 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 very strong sales CAGR of ~ 25% for
FY10–13E (adjusting for sale of business to HSP).
 FCCB redemption: OCP has ~US$167m of FCCBs (including YTM) due for
redemption in Feb-12. We believe OCP will need to refinance ~US$100m in
Feb-12 when FCCBs are due for repayment if the conversion does not happen.
Earnings and target price revision
 No change.
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 25% EPS CAGR for FY11–13. We
maintain our Outperform rating and target price of Rs415.