In a few months, the sale of Orchid’s API manufacturing facility to Hospira Healthcare India (a subsidiary of US-based generic major Hospira) in Aurangabad, along with a research and development (R&D) facility in Chennai and a product pipeline, for $200 million (around Rs 1150 crore), will be consummated.
This is the last in a string of sales that Chennai-based Orchid Pharmaceuticals has orchestrated in an attempt to reinvent itself, and in doing so, get rid of the humongous debt it has accumulated over the years.
The question is, is it better off now than it was before?
Orchid’s bread and butter, in the early 1990s, was the manufacturing of active pharmaceutical ingredients (API), while branching out into sterile injectables (such as penicillin) in the next decade. The company also specialised in producing betalactum cephalosporin, an antibiotic which attacks the cell walls of bacteria without affecting the immunity of the patient. Manufacturing of cephalosporin was limited to a few companies due to the expertise it required and Orchid was a major with 16 per cent of the market. The cephalosporin market today is worth $10 billion globally.
But in order to do so, it had to add facilities and capabilities which would suit the standard requirements of a regulated market. Developing such niche strengths requires a huge investment. For a company with all its sales overseas and no cash flow from the domestic market, Orchid had to raise funds frequently to set up facilities and invest in R&D, say analysts.
Raghavendra Rao, chairman and managing director of Orchid Pharma, says that the company built nine manufacturing plants, since stringent regulations restricted the company from producing certain drugs in plants producing other medicines.
“They had some good products like tazobactum and in order to manufacture it and take it to the regulated markets, they needed a huge investment. They had to borrow in order to fund the projects, while the revenue was limited from a few products,” said an analyst on condition of anonymity.
“This, coupled with high-tech sterile equipment that we chose to go in for, resulted in high debt. Simultaneity was also another reason for continuation of debt,” said Rao in a response to Business Standard’s queries over email.
Consequently, by 2009, Orchid’s debt went up to around Rs 3,000 crore. So dire was its circumstance that the company had to sell its main business, generic injectables, to Hospira, for around $400 million (Rs 1,850 crore in 2009).
Having sold its main business, the company started looking at niche segments to develop a new growth strategy. However, the company continued to make investments to support its existing businesses and the debt went up again by Rs 500 crore after the 2009 sale. Today, its debt stands at around Rs 2,100 crore.
The company now plans to focus on contract manufacturing and finished dosage formulations in niche segments, like opthalmology, oncology, immunosuppressants (agents used to reduce immune response) and biotech.
But, has this been the right strategy for the company? An expert from the industry, on condition of anonymity, says that the company has now turned predominantly into a commodity business, manufacturing and supplying APIs, compared to its earlier position as a manufacturer of niche value-added injectables. “The company earlier was trying to transform itself from API to formulations. Now with the sale of the unit to Hospira, it has become more of an API player. So, we don’t see any possibility of a significant upside regarding the valuation. We are neutral on the stock now,” said Sarabjit Kaur Nangra of Angel Broking.
Furthermore, analysts for institutional investors have in fact lost interest in the company after the first sales in the year 2009. Many of them stopped tracking it during the period between the first and the second sales.
Rao sees it differently. “I think we have been very smart in terms of timing of getting in and getting out of a segment of a business.”
With cash now available, new plans are in the pipeline. Approvals in the US, the sale of the carbapenem and penicillin API business and entry into new segments should help boost the company’s business. Besides, the company has its antibiotics (cephalosporin API and oral dosage forms) and non-antibiotics business still generating substantial revenue. Plus, the debt to equity ratios have come down significantly.
Still, for Orchid to succeed it has to be ensured that it doesn’t get lured into a debt trap again, while generating enough profits to finance its existing obligations.
