Orchid over the years has built significant expertise in the Antibiotic space Cephalosporin, Penicillins and Carbapenems) and capacity on the NPNC Segment.
The company also launched Tazo+Pip in the Europe, Canada and ANZ markets and expects it to contribute US $25-30mn to its FY2010 topline. It also expects to receive approval for Tazo+Pip in 2QFY2010 and Imipenem in 4QFY2010 in the US.
As of FY2009, Orchid had filed for 72 US DMFs and 58 ANDAs (29 in the Cephalosporin Segment, 21 in NPNC Segment, 5 in the Betalactam Segment and 3 in the Carbapenems space).
We expect FY2011 to be a turnaround year for the company owing to launch if its high-margin products, which is expected to result in improving cash-flow for the company going ahead.
Further, we expect Orchid’s dependence on Cephalosporin products to reduce as it launches products from the Penicillin and Carbapenems Segments.
In our FY2011 estimates, we have factored in launch of Tazo+pip in the US and Imipenem in the US/Europe.
We expect Tazo+pip and Imipenem to contribute around 53.7% of the company’s total formulation sales in the regulated market in FY2011E with operating margins in the range of 25-30%.
Outlook and valuation
On the earnings front, we have trimmed our estimate for FY2011 by 13.3% post increase in the MAT rate in the recent Union Budget from 10% to 15% as the company does not claim the MAT credit.
On the valuation front, the stock is trading at 5.3x FY2011E Earnings and 1.3x FY2011E EV/Sales, which we believe discounts the high debt on the company’s Balance Sheet and delays in receiving approvals for its key products.
We recommend a BUY on the stock at 7x forward earnings with a revised target price of Rs110 (Rs136).