>ORCHID CHEMICALS & PHARMACEUTICALS (RELIANCE MONEY)

Orchid Chemicals & Pharmaceuticals (Orchid) is an integrated pharmaceutical company with core competencies in the cephalosporin injectable space and that too in regulated markets of US. Having an established strong base in US cephalosporin segment, the company is now spreading its wings to other regulated markets like Europe and Canada. Further the company is progressing well in the non-penicilin, noncephalosporin (NPNC) and drug discovery front.

Tazo+Pip to power earnings ahead
Orchid has recently commenced the comercial launch of Tazobactum & Pipperacillin (Tazo+Pip) injection (the generic version of Wyeth’s Zosynin) in Europe during Q4FY09, with an addressable market of $250mn for Orchid. This product has limited competition with just two generic competitors like Sandoz and APP pharmaceutical. Given by the fact and Orchid’s well planed marketing pact with one of the leading marketers like – Hospira, We estimate Tazo+Pip
injection in Europe bring incremental revenue about $35-40mn during FY10. Further, it foresees the launch of Tazo+Pip injection in US by Q2FY10 with another $250mn opportunity. These two launches would boost the revenues as well as margin going forward.

Strong pipeline opportunities to drive growth
Alongside, Orchid is expected to launch approximately 12 to 13 products with market size worth $2.6 billion in U.S. and Europe together in 1-2 quarters time. On a longer term perspective, Orchid has the pipeline of Carbopenems (like - Imipenem + Cilastatin, meropenem), which are over $1billion opportunity and Ranbaxy is the only known competitor in the space, that would trigger the earnings late FY10 onwards. Also, Orchid holds 5 First-to-file opportunities for
Desloratidine-ODT and ER, Ibandronate, Memantine and Gemifloxacin, would maintain the growth momentum for the company beyond 2010. however, we have not factored Carbopenem and FTF opportunities in model yet and they remain surprising earning triggers.

FCCB Buy back and revised AS-11 to improve earning predictability
Orchid has recently bought back FCCBs worth $40mn (at a discount of above 40%). This would enhance the clarity on profitability front by reducing the possibility forex loss led by currency fluctuation. On the top of that, the forex translation losses, as per the new AS-11, would not impact the earnings rather would be reported directly in balance sheet. Thus, Going forward we do not factor forex translation differences a cause of concern, which has been the major
performance dampener in 9mFY09.

Steady improvement in financials
During 9mFY09, Orchid reported 15% revenue growth coupled with 24.8% OPM. But only the additional fiancial burden and the forex loss of Rs 1715mn (against a profit of Rs 790mn in corresponding period) have resulted in a net loss of Rs 765mn. But the likely reversal of translation losses in the shortly expected Q4FY09 result would boost the FY09E earnings.

Going ahead, with the immediate earning impact of Tazo+Pip launch and subsequent triggering of pipeline opportunities, we estimate revenue would grow at a CAGR of over 20% during FY09-11 and margins to remain firm backed by its cost reducing efforts and new launches. With the capex phase almost over, Orchid management has now committed to reduce its debt/Equity levels from current 2.7x to about 1x.

After factoring the AS-11, our back of the calculation shows that Orchid would report a profit of Rs 507mn resulting a EPS of Rs 5.6 during FY09. But as we expect the adjusted forex loss will be capitalized (resulting a higher depreciation), the EPS for FY10 and FY11 stands at Rs 14.3 and Rs 22.3, respectively.

Valuation
Orchid is currently trading at an attractive valuation of 5x it FY11 EPS its FY11 EV/ EBITDA. Further looking at the robust earning opportunities in the pipeline and debt reduction comitment, we recommend a BUY rating on Orchid with a target price of Rs 176 (8x FY11E).

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