Orchid Chemicals - A Value Buy

Orchid is a globally recognized, integrated pharmaceutical company with core competencies in the development and manufacture of Active Pharmaceutical Ingredients (APIs) and Finished Dosage Forms as well as in drug discovery.

Orchid product range for the US market comprises 21 antibiotics and 20 non-antibiotic dosage forms, many of which are also aimed at European as well as other regulated and emerging markets.

Currently regulated markets like US, Europe and Japan contributes to around 77% revenue, while the less regulated market like Hongkong, China, India etc contributes to around 23%.

At the current market price of Rs. 222/- the stock trades at around 13 times it's 12 month diluted EPS of 17.08. Last two quarters the company saw a good spurt in their Operating Margin. The EBITDA margin improved significantly to around 35% during the quarter. This was made possible due to their new product Cefixime and Cefdinir. We expect the company to do EPS of around 21 in FY08. Based on it's FY08E EPS, Orchid has a target of around Rs. 340/- with a horizon of 12 to 15 months.

Betting On

In the antibiotics space Orchid expect to launch new products in the cephalosporins, betalactams and carbapenem spaces between 2007 and 2010 in US, EU and Japan. In the non-antibiotic space, Orchid is developing a robust pipeline of over 80 products covering diverse therapeutic segments.

Orchid is done with it's investment phase and hereon the investment is expected to get translated into revenues. Orchid has invested in and completed projects for expansion and diversification in the cephalosporin, betalactam and non-penicillin, non-cephalosporin (NPNC) or lifestyle drug spaces. Cephalosporin projects have already been translated into revenues; betalactam, carbapenem and NPNC projects will translate into revenues in this fiscal and beyond.

Orchid has also entered into the CRAMS (Custom Research and Manufacture Segment) with two agreements under execution

1) With Pfizer Inc. for animal healthcare products
2) With Biovitrum AB to undertake medicinal chemistry

Fundamentals

1) Cephalosporin and betalactam dosage form facilities would start generating remunerative generic business in Europe from the second half of 2007-08.

2) The Company intends to establish a marketing presence in Japan, the second largest pharmaceutical market in the world (estimated at around US$ 60 billion).

3) Entered into marketing alliances for antibiotics as well as non-antibiotics dosage forms with major pharmaceutical players in the US and Europe, strengthening its regulated market position.

Risks

1) Orchid further dilution of Equity can reduce the Earnings visibility.

2) Rupee appreciation against the dollar can impact the Operating Margins.

3) Cost control and taxes imposed by government can reduce the profitability of the firm.