Comment

Orchid Chemicals has sold its most valued business, that of generic injectables, to Hospira, one of the world’s largest hospital products companies. The deal is valued at $400 million, more than four times the unit’s annual sales of about $90 million. Hospira is banking on Orchid’s low-cost manufacturing capability in injectables, a pipeline of seven products, mainly in cephalosporins and penems, and a research and development facility that can develop a future pipeline of drugs. Hospira has also said that having set foot in India through this deal, it can now look at developing a strategy for emerging markets.

The logic is simple. Pfizer has struck deals with Aurobindo and Claris; GSK has partnered Dr Reddy’s for selling products in emerging markets; and Hospira could not but have looked at similar options. Also, manufacturing injectables requires large fund infusions and they are way costlier to manufacture than in India.

K Raghavendra Rao, Orchid’s managing director, is a happy man, too, as he can use the money to manage the debt of Rs2,200 crore. Rao has also informed investors that Orchid will be able to recoup the loss of revenues from a supply contract with Hospira that stretches over the next ten years.

Orchid is presently seeing a revenue spurt from marketing the generic versions of Wyeth’s (now part of Pfizer) Zosyn in the United States and will continue to do so for the next three months. However, analysts doubt the company has anything left as future upsides beyond that single big opportunity.

Though many believe that with enough cash in hand Orchid can handle its balance sheet better, concerns are being voiced over the company’s longer-term revenue streams. Rao may have said that lost revenues can be made up through supplies of active pharmaceutical ingredients (APIs) and launch of new products, but that statement may spark an argument. APIs, even for injectables, make for a limited revenue source and a comparatively low-margin business.

Orchid, observers say, is probably left with a business that can at best be called a run-of-the-mill raw materials services business. If cephalosporin injectables have less future upsides in the coming years, what is left within Orchid has even lesser chance of succeeding unless Rao has some aces up his sleeves.

Again, Orchid may not quite be able to repeat the robust injectables portfolio it had developed in the last five years. Large companies are getting larger and smaller companies are succumbing to pressure, leaving fewer players in every segment.
For Orchid investors, the wait will now be mainly on two counts —- future product line-up to be declared by the management and the dividends from research on new products.

To be fair, Orchid’s ability to think new categories cannot be understated. It has a deal in place with Merck to work on new anti-infectives. The company has a bank of four patent challenges and could well get to tap newer markets for revenues. Again, Orchid’s shareholding is rather curious. As of end-September, promoters’ held 21.2% stake in the company, while Cyrus Poonawala, who owns vaccine company Serum Institute, held nearly 10%.

Ranbaxy, which held 9.67 million shares or 13.73% stake as of end-September through Rexcel Pharmaceuticals, a front of its subsidiary Solrex Pharmaceuticals, is said to have offloaded significant stake on Tuesday and Wednesday. In fact, this could well be the reason the Orchid stake ended down 10% on Wednesday. Ranbaxy had acquired the Orchid stake in 2008 after Rao was forced to offload 7% of his personal stake as margin calls were triggered due to the fall of Bear Stearns at Wall Street. Going by industry sources, the company was hoping to be able to market Orchid’s products. The surprise sale of the injectables business may have left it with little reason to hold on to the shares.

How Poonawala reacts to the deal remains to be seen. While expressing his surprise at the beating Orchid shares took after the deal announcement, Poonawala was reportedly confident the price will be better in the days to come, mainly riding on the Tazo-Pip opportunity.

(Pillman is an executive closely linked to the global pharma industry)