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| Orchid's sale of injectables gets thumbs-own from investors |
| BS Reporters / Chennai/Mumbai Dec 17, 2009, 00:17 IST |
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Drive down stock price by 10%, believe the deal will hit earnings
Investors in Orchid Chemicals and Pharmaceuticals gave a thumbs-down to the company’s decision to sell its injectables business. The stock was down 10.35 per cent at market close, after being driven to a 52-week high earlier in the day.
As the market opened, with rumours of a big deal that Orchid was going to enter, the share price rose to a 52-week high of Rs 239. Once the details of the deal were announced, the price tumbled to Rs 198. The belief is that the deal will hit future earnings of the company, analysts said.
 Orchid announced the sale of its injectables business to US-based Hospira for $400 million (around Rs 1,860 crore) on Tuesday. The sale includes Orchid’s beta-lactam antibiotics manufacturing facility, a research and development facility, as well as its existing and upcoming generic injectable products.
K Raghavendra Rao, managing director, told reporters in Chennai that the transferred business — with capital assets of Rs 600 crore — generated an income of around $90 million (around Rs 432 crore). The drugmaker will use a large chunk of the proceeds to pay term debt (Rs 1,200 crore). The balance would be used to meet working capital needs and in expanding its pharmaceutical business.
“The company also has a short-term debt of Rs 550 crore and $150 million convertible bonds, for which we have time till 2012,” he said.
“This deal will help deleverage the balance sheet significantly,” said C Bhaktavatsala Rao, deputy managing director.
As part of the deal, 14 molecules would be transferred to Hospira. “It will give Hospira the generic injectable product pipeline, as well as the future pipeline which Orchid has, and access to new products expected from the Chennai facility, along with the customers that Orchid has,” he said.
Analysts said the decision of Orchid has impacted the company’s future prospects, at least for the next three to four years. “The deal will not much impact the earnings of 2009-10, but will cause a it to lose about $110 million in 2010-11,” said Sarabjit Kaur Nagra, vice-president of research, Angel Broking.
Investors had been bullish about the prospects of the sold products, such as carbapenems injections, which were planned to be launched by next year, with estimated revenues of Rs 230-250 crore.
The company also claims to have four first-to-file (FTF) status products (this may get 180-day exclusive sales on patent expiry) of the 54 products pending for launch in the US market, but the upside from these products is not in the immediate vicinity, said analysts.
Orchid plans to develop non-antibiotics and oral antibiotics products, apart from its core strength of cephalosporins in future, according to Rao.
Going forward, the company will look at both organic and inorganic growth. “We don’t have anything specific at the moment but going forward, the focus would be high-technology, niche and difficult-to-do products,” he added.
The company, started in 1992 by Raghavendra Rao as an antibiotic cephalexin maker, has manufacturing units at Alathur and Irungattukottai near Chennai and at Aurangabad in Maharashtra.
Terry Kearney, chief operating officer, Hospira, said the investment in Orchid will be made through a 100 per cent subsidiary of Hospira which will be floated in one or two months.
“This acquisition aligns perfectly with Hospira’s strategy to improve our margins and cash flow, by lowering our cost position for a key product line, and to invest for growth, by expanding our presence globally and reinforcing our leadership position in generic injectables,” said Kearney.
This will also help Hospira to manufacture cost-competitive products from India, which would help the company to expand in overseas markets. “Another major advantage is research and development (R&D). Along with 450 people, the company will acquire 30 people who specialise in R&D,” he added.
Commenting on future investment, he said, “India will be an important focus and we will continue to invest.”
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