While the FDA approval for an antibiotic should improve revenue visibility and help Orchid Chemicals reduce debt, the upsides are priced in.
The Orchid Chemicals stock has jumped by over 40 per cent in the last three weeks due to the receipt of US FDA approval for the generic version of the injectable antibiotic, Zosyn. The announcement by the company, which specialises in the cephalosporin segment of antibiotics, is expected to a give a fillip to its revenues as well as earnings. Hitherto, the lack of approvals, poor capacity utilisation and high debt on books were responsible for the company’s sluggish financial performance.
The Tazo+Pip push
Orchid has launched Zosyn or Tazobactum and Piperacillin (Tazo+Pip), a drug used in treating bacterial infections, in September in the US through its partner, Apotex. The only other player vying for control of the $450 million pie for this drug during the six month exclusivity period is the innovator, Wyeth Labs. Considering that the company would be able to garner a market share of 40 per cent in the six months of the current fiscal and assuming a discount of 25 per cent, the opportunity for 2009-10 is estimated at about $67.5 million (Rs 337 crore). Typically, after a patent expires, prices fall sharply, but in this case the discount (or price fall) is assumed to be lower due to lack of competition--- only the innovator company and Orchid would be selling the product in the exclusivity period. Post the exclusivity period in 2010-11, the product is expected to fetch revenues of Rs 200 crore from the US market.
| NEW LAUNCH BENEFITS | ||||
| in Rs crore | FY08 | FY09 | FY11E | FY11E |
| Net sales | 1,301 | 1,315 | 1,578 | 1,894 |
| Operating profit | 340 | 296 | 426 | 511 |
| Net profit | 175 | -49 | 95 | 161 |
| P/E (x) | – | – | 13 | 8 |
| E: Analysts estimates | ||||
In addition to the US upside, the company has also benefited from the launch of the product in Europe, where it grossed sales of $7-8 million in the June 2009 quarter.
The FDA pipeline
In addition to Tazo+Pip, the company also got approvals for selling Zaleplon (pre-generic market size $90 million) and Sumatriptan ($970 million) in the US. So far, on a cumulative basis, the company has filed 58 abbreviated new drug applications (ANDA), half of which have been in the cephalosporin space. Out of the total, the company has seven first-to-file (FTF) applications where it could get an exclusive right to market its products for six months. These FTF opportunities are likely to materialise between 2010-11 and 2012-13. Till September 2009, it has received approvals for 37 ANDAs. Revenues are also likely to get a boost from the likely launch of Imipenem+Cilastatin, in February, 2010 an antibiotic from its Carbapenem segment with US sales of $250 million. The total market size of products filed with the US FDA and likely to be launched in 2009-10 and 2010-11 is pegged at $1.5 billion and $1 billion, respectively.
Asset utilisation
The company has been using only 40 per cent of assets as only one (Cephalosporins) of its four divisions (others being carbapenems, penicillin and non-antibiotics) was contributing significantly to the topline. The company currently gets about 85 per cent of its revenues from the cephalosporin segment. But, with the approval of Tazo+Pip order flows from Europe and the US markets, it expects the asset utilisation to move up to 60 per cent in 2009-10. It expects a further 20 per cent addition to come from production of its penicillin range of products.
Valuations
Poor levels of asset utilisation and the debt taken to service it have impacted Orchid’s profitability. The company reported a loss of Rs 49 crore for 2008-09 and Rs 29.76 crore for the June quarter of 2009-10. Going ahead, the management expects revenue growth of 20-25 per cent per annum over the next three years on the back of new launches, its formulations thrust in Europe and pipeline of products. Since it has no major capex (spent Rs 500 crore over the last two fiscals) going ahead, it plans to use the cash generated to retire debt which is pegged at about Rs 2,500 crore and equivalent to four times its networth. Meanwhile, the company borrowed foreign funds through the ECB route to buy-back part of its outstanding FCCBs and retire high-cost foreign debt. The company redeemed $40.05 million worth FCCBs, which were available at over 50 per cent discount. This has helped it to reduce its outstanding FCCBs to $154 million from $194 million. This should have some positive rub-off on financials in the interim. The company had earlier gone in for two FCCB issues of $19 million, which will be redeemed in October 2010, and $175 million due in February 2012.
While the company expects to maintain its margins going ahead, analysts believe that with the proportion of bulk drugs going down, formulations fetching higher margins, operating profit margins should move up to around 27 per cent mark in the current fiscal.
At Rs 175.80, the stock is trading at 13 times its 2009-10 estimated EPS of Rs 13.5 and has priced in the upside. However, over a one-and-half year period, the stock could fetch about 15-20 per cent returns from current levels.
