Stock review: Orchid Chemicals & Pharmaceuticals

Stock review: Orchid Chemicals & Pharmaceuticals

Orchid Chemicals & Pharmaceuticals (Orchid) has received US Food and Drug Administration (USFDA)’s approval to sell its much-awaited Tazo-Pip, a premium life-saving antibiotic injection, in the US market.

This is the first generic to be approved with Orchid receiving a 180-day exclusivity. Orchid would be immediately launching this product in marketing and distribution partnership with Apotex in the USA.

The company received approval for selling Tazo-Pip in the USA in H2FY2010 in line with our assumption, however the 180- day exclusivity is a positive surprise.


The much-awaited Tazo-Pip approval in the USA will provide lot of impetus to Orchid in terms of high visibility of growth along with the other high value products.

Furthermore, revenues from Europe, Australia and Canada have started to trickle in, indicating growth going ahead in the formulation segment. We expect a steady repayment of debt over the next three years, as product approvals come through and as the business in the regulated markets gains traction.

We remain positive on Orchid’s business model, which is focused on niche opportunities and has strong growth drivers. The buy-back programme and the absence of any major capital expenditure (capex) requirement would improve Orchid’s financial structure going forward.

However, we highlight that Orchid has disappointed on this front in the past (with capex ahead of guidance) and its valuations are likely to improve only after the improvement is actually visible on the balance sheet.


The launch of Tazo-Pip in the USA and the incremental revenues from the Penem segment (expected in Q4FY2010) would act as major triggers for the stock in the near term, whereas the reduction in debt levels and interest cost would drive the stock in medium to long term.

At the current market price of Rs164, Orchid is discounting its FY2011E earnings by 7.2x. We maintain our BUY recommendation on the stock with a revised price target of Rs184.