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24 Making The Right Moves Orchid Chemicals & Pharmaceuticals Ltd (Orchid) is a leading pharmaceutical company headquartered in Chennai, India. The company is involved in the development, manufacture and marketing of diverse bulk actives, formulations and nutraceuticals. With exports spanning more than 75 countries, Orchid Pharma is the largest manufacturer-exporter of cephalosporin bulk actives in India and is ranked amongst the top five cephalosporin producers in the world. Due to mounting debts and unfavourable economic conditions, Orchid Pharma was facing operational difficulties till FY10. To overcome these issues, the company sold its generic injectable formulations business for US$ 400 mn to Hospira in March ’10. The agreement covered sale of assets, products, product in the pipeline and the team to manage the transferred assets. Beyond Market 04th Feb ’11 Through its rich product portfolio and right expansion plans, the company is trying to �nd the right balance between growth and pro�tability BUSINESS OVERVIEW Orchid Chemicals & Pharmaceu�cals Source: Company, Nirmal Bang Research API FORMULATION R & D CRAMS Cephalosporin Penicillin Carbapenems NPNC Cephalosporin NPNC NDDS NCE BIOTICS ACTIVE PHARMACEUTICAL INGREDIENTS (API) Currently, Orchid Pharma gets 70% of its total revenues from API. The company has become API-skewed after it sold its injectable formulations division to Hospira. The transaction was completed in Mar ’10 and included a supply agreement between the two companies where Orchid Pharma would supply API to Hospira for the injectables for 10 years at pre-determined volumes and prices. This ensures stability of margins for Orchid Pharma, going forward. It’s simplified...
Niche Product Segment: Orchid Pharma supplies APIs for cephalosporins, penicillins, sterile carbapenems and non-penicillin non-cephalosporins products (NPNC). These are difficult-to-manufacture products with high entry barriers and, hence, with limited competition. Orchid Pharma has the largest cephalosporin API facility in Chennai and has been approved by USFDA, UKMHRA and other regulatory agencies. It has cumulative DMF (drug master file) filings of 81 spread across cephalosporins, NPNC, beta-lactums, carbapenems, etc. It has also filed 21 COS (Certificate of Suitability) for the European markets. FORMULATIONS Orchid Pharma is making efforts to increase its contribution from formulations, from the current 30% to 50% of its total revenues in the future. As a matter of strategy, the company is targeting niche product segments with attractive margins and in areas where it has the required expertise. It has developed a strong product portfolio in oral cephalosporins and in NPNC (non-penicillin non-cephalosporin) and will continue to market oral formulations in the domestic, regulated and semiregulated markets. For regulated markets, the pharma company is relying on the partnership model for front-end exercise. Orchid Pharma has acquired a front-end company called Karalex Pharma, LLC to expand its presence in the sales and marketing of generic products. Cumulatively, the company has filed 39 ANDAs including eight Para-IV FTF filings. Of these, it has already settled four Para-IV with innovators. This is a huge success for any company and would ensure momentum of growth in the long run. RESEARCH & DEVELOPMENT Orchid Pharma also undertakes research and development activities. It has a wholly-owned subsidiary - ORLL (Orchid Research Laboratories Ltd), which focuses on NDDS, NCE and CRAMS for research. It has 130 scientists. The pharmaceuticals company has developed a healthy product pipeline in the R&D segment. They are under various stages as shown in the chart. Beyond Market 04th Feb ’11 �� Segment NCE Di�covery 1 Tyrozine - TZD, Non-PPAR Molecule Diabetes 2 DPP IV Inhibitor 3 Novel 1 Th1/Th2 Cytokine Synthase Inhibitor Inflammation 2 PDE IV Inhibitor 3 TNF � Inhibitor Oncology 1 STAT 3 / IL-6 Inhibitor (Non-Cytotoxic) 2 HDAC Inhibitor 1 Oxazolidinone Anti-Infectives 2 Cephalosporin 3 Betalactamase Inhibitor Clotting Disorders 1 Oral Direct Thrombin Inhibitor Obesity 1 Novel CNS 1 Novel Source: Company, Nirmal Bang Research INVESTMENT RATIONALE �� We believe the deal is beneficial for Orchid Pharma in the long term as huge debts and economic slowdown had hampered the overall growth of the company, due to which it was not able to realize the true potential of its healthy and attractive product portfolio. As per the agreement, Orchid Chemicals & Pharmaceuticals Ltd transferred its generic injectable business to Hospira and received $400 million in cash. Also, Orchid Pharma managed to get 10 years’ API supply agreement from Hospira for the sold injectable formulations, at a pre-determined volume and price. On one hand, this would ensure growth momentum and on the other hand, it would provide stability to the pharma company’s margins. Other Benefits From This Transaction �� Orchid Pharma had huge debts of around `2,985 crore in its books as on 29th Mar ’10. After the business transaction, Orchid Pharma could repay around `1,400 crore worth of loans. This significantly deleveraged the company’s balance sheet and at the same time improved its financial ratios. �� Hospira’s formidable presence in the global injectables market should translate into higher demand for formulations and, hence, for Orchid Pharma’s APIs. �� Orchid Pharma has adopted a combination of various marketing strategies to reach different geographies as the characteristic of each market is unique. ��Regulated Market The company has presence in all regulated markets, namely the US, EU, Australia and Japan. These markets It’s simplified... 25
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