Mumbai: A day after Orchid Chemicals and Pharmaceuticals Ltd announced the sale of its injectable pharmaceuticals business to US-based drug maker Hospira Inc. for $400 million (Rs1,868 crore), the Chennai-based firm’s shares slumped around 10% on heavy selling by some large shareholders.
According to one analyst, Ranbaxy Laboratories Ltd, which had a 13.3% stake in Orchid, has sold a bulk of its holding in the past two days.
Ranjit Kapadia, vice-president, HDFC Securities Ltd, said that while heavy selling by Ranbaxy was the key reason for the drop in Orchid’s share price, the divestment of the profitable injectables business was also a concern for investors.
Reducing debt: Orchid Chemicals’ headquarters in Chennai. The firm will use the injectables deal proceeds partly for repaying debt.
There were eight large deals on Orchid on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) on Wednesday, involving around 5.5 million shares, or around 7.7% of the firm’s total equity.
Solrex Pharma Ltd, a Ranbaxy company that holds bulk of the group’s stake in Orchid, on Tuesday sold 500,000 shares.
Orchid shares lost Rs22.85 each on BSE to end Wednesday at Rs197.85. On Tuesday, Orchid lost 3.27%.
K. Raghavendra Rao, a first-generation entrepreneur who set up Orchid a decade and a half ago after returning from Oman, where he worked as a senior executive with the metals-to-drugs Al Burhani Group, has made the biggest business deal in terms of premium in the Indian pharmaceutical industry.
The injectables business earned $70 million in the year ended March. The $400 million deal value is nearly six times this business and 12 times Orchid’s operational profit.
In 2008, when Japan’s Daiichi Sankyo Ltd acquired Ranbaxy, India’s largest drug maker by sales, the transaction was valued at a premium of less than 10 times its operational profit.
Hospira has been an outsourcing partner to Orchid since 2005 for antibiotic injectables. The business relationship and an already developed market for these products make for synergy.
Orchid was under financial pressure with a total debt of Rs2,500 crore, including foreign currency bonds worth $150 million redeemable in 2012, and urgently needed a fund infusion to sustain the operations.
Rao had also pledged at least half of the 22% stake he and his family held in the company with a clutch of institutions. Orchid’s debt-to-equity ratio was 1.5%.
Rao said on Wednesday that a significant portion of the deal proceeds will be used for repaying the debt, including long- and short-term loans from banks. “This will help the company strengthen its balance sheet to explore new growth opportunities, including some acquisitions,” he said.
The deal with Hospira covers Orchid’s generic injectable formulations business, its beta-lactam antibiotics manufacturing complex and its pharmaceutical research and development facility near Chennai. Orchid is left with its bulk drug or active pharma ingredients (API) business, contract manufacturing service and its drug discovery activity.
But a long-term exclusive agreement for Orchid to supply bulk drugs for the acquired generic injectable pharmaceuticals business with Hospira would offer an increase in its API business. This agreement builds on the existing product development and commercialization relationship between Hospira and Orchid.
“This transaction and the long-term API contract are a testimony to the competitiveness of Orchid’s product portfolio in the global pharmaceuticals landscape... It will also provide Orchid with the financial flexibility to pursue new growth opportunities, and build upon our successful track record of value creation for our shareholders,” Rao said in a statement on Tuesday
By selling the manufacturing and research facilities, Orchid has transferred around 450 employees dedicated to the development and production of beta-lactam antibiotics to Hospira. “So we will save 25-30% staff cost once the deal is completed by the end of next quarter, apart from an immediate reduction of Rs200 crore on the interest cost,” an Orchid executive said on condition of anonymity.