By selling its generic injectables business to Hospira, Orchid Chemicals and Pharmaceuticals might have to swallow a pill far bitter than some of those it manufactured at its Irungattukottai facility in Chennai.
Given the Rs1,900 crore sale proceeds, Orchid will be able to repay the bulk of its Rs2,200 crore debt. Managing director K Raghavendra Rao has in fact said that as much as Rs1,400 crore will go towards settlement of debt. But in the bargain, it will have to pay a huge price.
“The face of Orchid has been wiped off by this deal” is how a pharma industry watcher with an equity firm summed up the deal on Wednesday. The “face” was a reference to the injectables business — penicillin, carbapenems, cephalosporins, tazobactam piperacillin — which made Orchid what it is, or was.
Bhavin Shah, a research analyst with Dolat Capital Markets, says that with the core business gone, the company would have to build a core anew.
“The deal looks like a compulsion to generate cash to wipe off the debt. But the company’s positioning is gone. What it’s left with is the API business, non-antibiotics, non-cephalosporin. They have to start thinking through a new vision, and that’s not easy,” said the associate director of a professional services firm.
Following the deal, Orchid’s margins are expected to drop from the current 24-25% to 20-22% in FY11, said the industry watcher from the equity firm. “Injectables would have fetched margins of 27-28% as they have higher penetration and prices are higher. Now that’s dashed off.”
Moreover, Orchid was awaiting approvals from USFDA and MHRA (of EU) in calendar 2010 for carbapenems, a class of antibiotics that includes imipenem and meropenem, which together have a billion-dollar potential in the US and EU.
Sarabjit Kour Nangra, vice-president, research at Angel Broking, feels Orchid could have earned at least $50 million from both markets in 2010-11, subject to approvals. “Carbapenems was a good business area with limited competition.”
Tazobactam Piperacillin or Tazo-Pip, an antibacterial combination product was to be another key growth driver for Orchid in both the US and EU, where it has an $800 million potential.
Rao is confident of cashing in on the 180-day exclusivity of Tazo-Pip in the US before the deal with Hospira closes.All the same, there is no near-term driver for Orchid and API will not hold much value like formulations, says Nangra.
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