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Thursday, December 17, 2009
Deal with Hospira to add Rs 7-8 to FY11 EPS: Orchid Chem
US-based pharmaceutical major Hospira has signed an agreement with Chennai-based Orchid Chemicals to acquire its antibiotic injectable facility based out of Chennai for nearly USD 400 million.
Confirming the news K Raghavendra Rao, Managing Director, Orchid Chemicals & Pharmaceuticals said the deal, involving transfer of 400 employees to Hospira, would help deleverage balance sheet significantly.On the rational behind the move, he said that there was not enough upside left in the cephalosporin business. “We could see no additional revenue from the injectibles operations,” he
“The company will get cash once the deal formalities are completed,” he said, adding that of the USD 400 million, Rs 1,400 crore would be utilized for debt repayment and the remaining cash would be used for business development.
The deal, he said, was expected to be earnings per share (EPS) accretive by Rs 7-8 for FY11.
Further, he said, Hospira did not hold stake in the company domestically. “Para 4 FTFs still remain with us.”
Here is a verbatim transcript of an exclusive interview with K Raghavendra Rao on CNBC-TV18. Also watch the accompanying video.
Q: Walk us through with what this means by way of what gets diluted or hived off from your revenues? What do you think will get added back in this ten year long deal with Hospira?
A: This is a deal which will help Orchid in many ways. First of all we are continuing our relationship with Hospira and are strengthening it further by getting into long-term agreement with them to enable them to sell our injectable products in many more markets.
Hence, they will be doing the injectable dosage business. We will support them from the backend by supply agreement for the period of ten years.
Q: Your stock has reacted on the way down today. I can only imagine that the markets apprehension is to restore your balance sheet. You sold off the most exciting part of your business and kept largely the active pharmaceutical ingredients (API) side. Is that a fair criticism of this deal that you have done that to protect your balance sheet? You have probably sacrificed the most rewarding and high potential part of your business.
A: We had to see the perspective. If you look at the three parts of the business that we have given to them, one is the cephalosporin injectables business which is in the mature phase. There are no exciting news cephalosporin antibiotics dosage that are going of patent in the next few years. So the cephalosporin and other products, which we have launched in the last three-four years, have come to a matured phase. Therefore, there is no great additional revenue or profits that can come from that.
By the time the deal is consummated, we would have encashed the complete exclusivity period that is given to us by the FDA by March 15. By March 31 this agreement is going to be converted into actual transaction. So post the exclusivity period the other competitors will come in so normal run rate is what is going to happen and not an exclusive position in that.
Two carbapenems where the dosage forms are the ones which are going to get sold by them. There are no new penems that are going to come in the next five years. Only after five years other penems patent expiry is happening. This is seven injectables that are being given to them in terms of dosage form sale and supported by the backend bulk supply. All the rest of the business including non-antibiotics and cephalosporin oral and all antibiotic oral business including dosage forms for the regulated market is with Orchid.
I do not think there is criticism of most exciting which is being hived off. Also the valuation we are getting is not only just for the debt leveraging but we are looking at current year operations on a run rate basis of USD 90 million of topline and USD 35 million of EBITDA. So it is more than four times sales and about 12-13 times EBITDA. I think it is a decent valuation.
Q: Since you have indicated that the main plan over here is to retire debt what is the current debt on books? Will all USD 400 million go towards repairing that? How does this change your interest outlook going forward?
A: Interest sharing of very close to Rs 200 crore will be there because of the amount that we will receive in a couple of months. We have a long term debt of Rs 1,200 crore. We have a working capital of about Rs 550 crore. That will become about half because we do not need that much working capital to run the business and USD 150 million of FCCB are due in 2012.
This is the total debt profile of the company. So post this transaction we will be left with no long term debt. FCCBs will be there for USD 150 million which are due in 2012. About Rs 250-300 crore of working capital will be left in the books. We will have enough cash in the company to look at new growth opportunities as we go forward.
Four years back Orchid did not have a single injectable formulation. We could create a value for part of our business for USD 400 million. With USD 400 million into the company, in the next four years, we can definitely create much more value with opportunities going forward.
Q: Does Hospira hold any stake in your company because Solarex has been selling and Hospira has been buying and could hold close to 5% stake in Orchid right now?
A: They do not hold any shares in the company. I do not know internationally whether they have any GDR and other things because domestic shares they do not hold and what Solarex is selling is independent of what anybody else is holding. Therefore, I do not think they are selling and these people are buying.
Q: What is the profitability and margin profile of the residual business after the injectables are going out because one gets the sense that what you have sold is inherently with a much higher marginal profitability profile than the API business that you have at this current point even with a sure revenues from Hospira?
A: There is a model that we have worked on them in terms of how the pricing will be done for the bulk assets, product mix and the quantities. Therefore, a combination of these is resorting the most part of the EBITDA. The current run rate USD 90 million of topline and USD 35-40 million of EBITDA which is going to be affected by transfer of these assets or this business to them. However, at the net profit level it will make a much better sense because of the interest saving as well as at the EDIDTA level will claw back most of it by adding products to this pipeline for which they have to buy exclusively from us for the next 10 years as well as increase the quantities. This is because they have their proprietary dosage delivery items in which these antibiotics go.
The ramp up of the business in different markets, products and quantities will help us claw back the most of the EBITDA that we will be loosing at the moment. The current run rate, just about USD 90 million topline and USD 35-40 milion of EBITDA, is part of this business that we have given to them.
Q: What will be the first cut in terms of EPS getting hived off first for FY10 and FY11?
A: In FY10 there is no impact because this transaction is closing in first or second half of March. In FY11 it will be EPS accretive because at the net profit level my estimate is around RS 7-8 EPS. This accretion should happen because even though we are loosing a little bit on EBITDA we are saving on interest as well as we will claw back EBITDA itself by doing more quantities and more products. So I think it will be Rs 7-8 accretive for FY11.
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