Orchid lowers debt, but loses sheen

Orchid lowers debt, but loses sheen
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First Published: Wed, Dec 16 2009. 09 49 PM IST

Updated: Wed, Dec 16 2009. 09 49 PM IST
When a company with a market capitalization of around Rs1,500 crore sells a part of its business for 1.25 times its market value, one would expect investors to be pleased. But Orchid Chemicals and Pharmaceuticals Ltd’s decision to sell its generic injectables business to Hospira Inc. for $400 million (Rs1,868 crore) met with a negative response. Its shares fell by 11% to Rs197 on Wednesday, simply because the injectables business represented the growing and profitable part of the company.
Earlier, Orchid and Hospira had an alliance by which Orchid would supply products to Hospira for marketing. It had similar alliances with other drug companies. Hospira benefits by getting the full margin on the sales, which it had to earlier share with Orchid. In addition, it gets a business that is in its growth phase.
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In September, Orchid had announced getting a six-month exclusive window to sell generic Zosyn. It had forecast a 20% revenue growth in fiscal 2010 based on this approval. The December and March quarters will see these revenues accrue but after that this business will shift to Hospira. The entire injectable formulation sales, too, will shift out but Orchid has entered into a 10-year contract to supply active pharmaceutical ingredients, the basic inputs. The company said in television interviews that the net hit (after accounting for API, or active pharmaceutical ingredients, sales to Hospira) to revenues in fiscal 2011 will be $90 million, or Rs419 crore, and to earnings before interest, taxes, depreciation and amortization at about $35 million or Rs163 crore. According to consensus estimates collated by Reuters, the company was expected to report revenues of Rs1,800 crore in FY11. The impact on profit will be much larger given that the injectables business is much more profitable.
Orchid will use the money to lower its debt, which is quite high at present, with Rs1,800 crore in loans and Rs792 crore in foreign currency convertible bonds, at the consolidated level. Interest costs of Rs56.6 crore in the September quarter was higher than its profit before interest of Rs50 crore.
The main reason Orchid’s stock price has risen since October was the anticipation of revenues from the launch of generic Zosyn and a rising contribution in coming years from the very product portfolio it has now sold to Hospira.
The repayment of the debt and the ensuing fall in interest costs is certainly a positive. But it is not enough to offset the absence of a key growth engine which is playing a key role in current stock valuation.
Graphics by Naveen Kumar Saini / Mint
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First Published: Wed, Dec 16 2009. 09 49 PM IST