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We expect a 28% CAGR in topline growth over the period FY11E to FY13E. Our EPS estimates on diluted basis
(assuming FCCB Conversion) for FY12E and FY13E are at Rs. 22.9 and Rs. 32.0 respectively. The stock is
currently trading at an P/E multiple of 11.5x and 8.2x times its FY12E and FY13E numbers. We are bullish on
the stock with a STRONG BUY rating and a price target of Rs. 384 at an P/E multiple of 12.0x times its
FY13E numbers.
COMPANY BACKGROUND
The company was incorporated on 1st July 1992 as a 100% export oriented unit (EOU). The company has a
presence spanning across multi-therapeutic segments like anti-infectives, anti-inflammatory, central nervous system
(CNS), cardio vascular segment (CVS), nutraceuticals and other oral and sterile products. The organisations since
its inception has grown into substantial size spread across several developed markets like USA, Europe, South
Africa and Japan (Exhibit I) and the journey is encapsulated as under. (Exhibit II)
Exhibit I: Organization Structure
Subsidiaries
Joint Ventures
The company has evolved into a fully integrated Indian pharmaceutical Company, straddling the pharmaceutical
chain with its presence in six clusters: APIs, CRAMS, branded generics, regulated generics, Novel Drug Delivery
Systems (NDDS) and New Chemical Entities (NCEs). (Exhibit IV)
Domestic Global
Global API CRAMS NDDS NCEs
Formulations Generics
CURRENT OPERATIONS
The company has three API manufacturing sites out of which two are in India and one is in China which is a 50:50
JV with North China Pharmaceuticals Company (NCPC); three formulations manufacturing sites and two world
class R&D sites. (Exhibit V)
Exhibit V: Infrastructure Facilities
Active
Pharmaceutical Formulations Research &
Ingredients
Manufacturing Development
Manufacturing
The company has Multi Horizon Strategy for API, Formulations and Innovation. (Exhibit VI)
Exhibit VI: Multi - Horizon Strategy
Formulations
The formulations manufacturing facility at Irungattukottai (IKKT), near Chennai has modern infrastructure
geared to offer high throughput, coupled with R&D labs, this formulations infrastructure is in the forefront of the
company’s entry into the advanced markets of US and Europe. The oral formulations facility manufactures various
types of dosage forms such as oral tablets and capsules in diverse dosage strengths and product categories. The
facility has been approved by leading regulatory agencies including the US FDA, UK MHRA, MCC (South Africa)
and Danish Medicines Agency, based on specific filings. Several ANDAs (abbreviated new drug applications) have
been filed from this complex with approvals and new launches underway.
The oral non-cephalosporin formulations facility at Alathur, Chennai specialises in the manufacturing of nutraceutical
products. The facility produces a range of dietary supplements for the advanced markets. Many other high-value
products like anti-diabetics, cardio vascular drugs (CVS), anti-depressants and anti-epileptics are manufactured in
this facility to cater to the emerging markets. Built to GMP (good manufacturing practices) standards (WHO
guidelines), this facility has packaging machinery and a full-spectrum, dedicated quality control and microbiological
services, adding distinctiveness to the manufacturing quality.
The oral cephalosporin formulations facility again at Alatur, Chennai manufactures cephalosporin oral products
dedicated to the domestic and emerging markets. The facility has the capability to manufacture different dosage
forms like tablets, capsules, dry syrups and liquid orals. The facility conforms to cGMP standards and is approved
by the WHO.
The wholly owned subsidiary, Orchid Research Laboratories Limited’s (‘Orchid Research’), multi-thera-
peutic, multi-lead portfolio and selective partnerships with the global customers for their projects reflects its
emergence in the global drug discovery space as a potential player. Lead molecules have been identified in two
therapeutic areas – anti-infectives and clotting disorders – based on confirmatory microbiological and pharmaco-
logical studies.(Exhibit VIII) The medicinal chemistry division trained scientists who perform design and synthesis
of novel molecules in various therapeutic areas such as anti-infectives, anti-inflammatory, anti-cancer and meta-
bolic disorders.
Bexel Pharmaceuticals Inc. (Bexel), the drug discovery subsidiary in the USA, is working on – innovative
compounds in the areas of diabetes, inflammation, obesity, multiple sclerosis, cardiovascular and auto-immune
diseases.
The company focuses on developing Novel Drug Delivery Systems (NDDS) for select anti-infective mol-
ecules. A few platform and product specific technologies with six prototype formulations have been successfully
developed. The areas of NDDS Research are Drug specific, Platform technologies and Disease conditions.
The company to leverage its R&D base has taken up Custom Research and Manufacturing Services
(CRAMS) as a discrete initiative.
The company has filed cumulative 36 ANDAs with the US FDA (23 in the non penicillin, non cephalosporin
(NPNC) segment and 13 in the oral cephalosporin segment) and filed cumulative 18 marketing authorizations in
the EU (12 in the oral cephalosporin segment and 6 in the NPNC segment)
In 2009-10, the company sold its generic injectable formulations business for around US$400 million to Hospira,
a generics injectable major. The agreement covered the sale of assets, products, product pipeline and team to
manage the transferred assets. Orchid sold its betalactam antibiotics formulations manufacturing complex (com-
prising the cephalosporin, penicillin and carbapenems facilities) and a pharmaceutical research & development
facility at Irungattukottai, Chennai. It transferred its ten-product generics injectable product portfolio - seven
cephalosporins, one penicillin and two carbapenems. It also transferred 24 ANDAs and 12 Dossiers along with
450 employees, dedicated to the development and production of sterile betalactam antibiotic formulations, to
Hospira.
The growth strategy going forward for the company can be outlined as under: (Exhibit IX)
PERFORMANCE
Orchid’s focus on formulations and maintaining high operating margins has translated into an good financial
performance as demonstrated by a 7% CAGR in revenues and 43% CAGR in net profit over the period FY06 -
FY10. (Exhibit X) However going forward the company is expected to grow at 28% CAGR in revenue terms and
39% CAGR on the bottom line. (Exhibit XI)
785
573
25,650
21,375 1,950
15,750 1,401
58
48
39
37
26 27
Bulk actives are otherwise known as Active Pharmaceutical Ingredients (APIs) or bulk drugs. They comprise
medicinally active ingredients that are converted into formulations or dosage forms.APIs are either manufactured
in-house by formulation companies or they can be outsourced to third party API manufacturers. The global API
industry has grown substantially over past few years due to the growth in generics industry. Most of the compa-
nies that purchase bulk drugs are generics manufacturers. India‘s bulk drug/API exports account for 21% of
India‘s pharmaceutical industry, which, in contrast to many developed countries is significantly higher as bulk
drugs are mainly manufactured for internal consumption.
The main reasons for growth in API business is:
. Growth in the international generics industry
. Increasing share of the Indian companies in DMF filings
. Contract manufacturing opportunity
Formulations
Formulations involve developing a preparation of the drug (from APIs and other ingredients) which is both stable
and acceptable to the patient. This usually involves incorporating the drug into a tablet, capsules, injectibles,
syrups, etc. The formulations are administered to or taken by the patient and are available either by prescription
or over-the-counter.
The domestic formulations industry grew at a CAGR of 14.3% from around USD 4.3 billion in 2002-03 to USD
8.4 billion in 2007-08. The Indian market expanded much faster than the global pharmaceutical market as a
whole. It is expected to reach USD 21.5 billion in 2015-16. The break-up of key therapeutic categories for 2007-
08 is as under (Exhibit XIII)
13% Anti-Infectives
18% Gastro
5% Cardic
Respiratory
5% Pain
Vitamins
5% 11% Gynaec
CNS
6% Dema
Anti-Diabetic
11% Others
8%
9% 9%
The global market for generics is expected to grow significantly on account of number of blockbuster drugs going
off patent over the coming years. The manufacturing of these generic are centered around China, India, Eastern
Europe and Brazil. USA is the major market for generics followed by Europe and Japan.The major driver for the
Pharmaceutical Industry in these markets is the percentage of ageing population is rising faster resulting in rising
healthcare cost. In such countries the government has modified its laws for generic medication and has thus
enabled more companies to file DMFs and formulation dossiers.
VALUATION
We expect a 28% CAGR in topline growth over the period FY11E to FY13E. Our EPS estimates on diluted basis
(assuming FCCB Conversion) for FY12E and FY13E are at Rs. 22.9 and Rs. 32.0 respectively.
The stock is currently trading at an P/E multiple of 11.5x and 8.2x times its FY12E and FY13E numbers. We are
bullish on the stock with a STRONG BUY rating and a price target of Rs. 384 at an P/E multiple of 12.0x
times its FY13E numbers.
Fiscal Year FY08 (A) FY09 (A) FY10 (A) FY11 (E) FY12 (E) FY 13(E)
KEY RISKS
The key downside risks are as follows:
i) Large part of the promoters stake is pledged
ii) Inability to rollover FCCBs in case of non conversion.
iii) Exposure to foreign exchange fluctuations
CONTACT NUMBERS
Dealing: +91 22 24982525 Research: +91 22 24981515
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