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Investors can prune their exposure in the Orchid Pharma stock, given the uncertain outlook for the company’s business. With no near term triggers and ambiguity over the medium term growth, the stock currently looks expensive. At Rs 108, the stock trades 12 times the company’s FY14 earnings, which appears high given the low margin profile of the business.
Orchid started with manufacturing cephalosporin and gradually expanded into other antibiotic products such as penicillin and penems. It currently derives a substantial portion of revenues from anti-biotic drugs. In 2009, the company sold its betalactam injectable facility to US pharma major Hospira for $400 million (Rs 1,900 crore then). The stated rationale behind sale of Orchid’s core injectable business was to repay debt and de-leverage the business. Out of the total receipt of Rs 1,900 crore from Hospira, the company repaid Rs 1,000 crore worth long term debt by FY10. But since FY10, there has been no reduction in the total debt. Instead, Orchid’s total debt at the end of March 2012 stood at Rs 1,721 crore, higher than Rs 1,683 crore in FY10.
The company recently signed a business transfer agreement with Hospira to sell its penems and penicillin businesses too. The sale includes transfer of its active pharma ingredient facility at Aurangabad, associated process R&D, existing product patents along with the pipeline and 830 employees. On completion of the sale, Orchid will receive $200 million (Rs 1,060 crore).
Of the total sale proceeds of Rs 1,060 crore, the company plans to repay borrowings totalling to Rs 800 crore. The balance Rs 260 crore is intended to be used to meet Orchid’s working capital requirement.
The company is currently just left with Cephalosporin active pharma ingredient and formulation manufacturing businesses. Orchid’s revenues grew at a tepid five per cent to Rs 1,873 crore in FY12. Profits slumped by almost 38 per cent to Rs 97 crore last fiscal.
Orchid’s revenues and operating profits may likely be lower by Rs 470 crore and Rs 70 crore, respectively, in FY13 due to the sale of its business to Hospira. However, partial repayment of the debt as indicated by the management may provide some respite to the earnings in FY13.
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