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Apr 10, 2008, 04.08 PM IST | Source: CNBC-TV18

Ranbaxy denies Orchid's hostile takeover bid

Ranbaxy Labs mgmt told CNBC-TV18 that it does not believe in hostile takeovers. This reaction has come after Solrex Pharma, a Ranbaxy promoter company, bought 12.8% stake in Orchid Chemicals in 2 days. This news created buzz that Ranbaxy plans a hostile takeover of Orchid following which the latter's stock price price shot up.

By Vikas Dandekar , CNBC-TV18

Ranbaxy Laboratories management told CNBC-TV18 that it does not believe in hostile takeovers. This reaction has come from Ranbaxy after Solrex Pharmaceuticals , a Ranbaxy promoter company, bought 12.8% stake in Orchid Chemicals  in two days. This news created buzz that Ranbaxy plans a hostile takeover of Orchid Chemicals following which the latter's stock price price shot up.

However, after the denial from Ranbaxy, Orchid Chemicals was trading at the day's low.

There seems to be a contradiction between what Ranbaxy is saying and what it is doing through its group companies. But it doesn't seem to be over yet and there may be a lot of moves from both sides. It’s still short of the open offer, while the Orchid promoters are also looking at mobilising more funds so that they can hike their own interest in Orchid.

So while Ranbaxy has made this statement; the game is still not over. One has to wait and watch for more negotiated deals. It is a very curious turn that this entire thing has taken.

But spokespersons from Orchid Chemicals say that there is no such concern as far as management control is concerned. On how they want to mobilise funds for the conversion of warrants into equity, they said that they are in the final stages of getting the funds needed to convert those warrants into equity.

So they are also looking at hiking Mr Rao's stake from 17-18% to about 25%. Neither party looks to be letting up as of now.

There always seems to be some underlying understanding; 12% is quite a chunk. The operational synergies are phenomenal if Ranbaxy really gains control of Orchid, because they don’t have so much of a pipeline as far as high margin Cephalosporins are is concerned.

The coming couple of years will be very interesting to watch Orchid. Already in the last two years of their presence in the US, they have made USD 55 million and the pipeline does look very robust. So for Ranbaxy, it does add up to a lot of topline while the high margins will really boost their bottomline. It makes sense for Ranbaxy to go for it, but we don’t know how the whole thing is going to pan out. We have not seen too many of these hostile takeovers in India.

But it will be interesting how the two big shareholders stay together in the same company. For a very long time there has been a need for a big bang merger in the Indian pharmaceutical industry. It’s highly unbelievable that in the domestic formulation space, the biggest company Cipla has a market share of about 5.5%; a company which does Rs 3,500 crore in sales has only 5% market share in its own country.

Knowing Mr Malvinder Singh, he has been very aggressive where M&As are concerned; B-Tabs, Terapia and other deals have been indicative that he wants to grow big at the back of acquisitions and that probably will also come in the domestic formulation space, especially when there are so many manufacturing capabilities available.

Cephalosporin, people had been regarding it as a low margin business, but going by the product line-up of Orchid, it sounds good. Most of the Cephalosporins do not have a headlong price fall; the price fall is about 20-30% or maximum 40%. So if one looks at Ceftriaxone there has been limited competition. So it looks good for Orchid given the fact that there has been a massive financial mess up of about Rs 900 crore debts and the USD 200 million worth of FCCB convertible, which will be coming in 2012.

There is nothing wrong with the manufacturing facilities or the projects lined up by Orchid. So if there is a move to align with Ranbaxy; Orchid and Ranbaxy both have a win-win kind of a situation.   

The warrants scenario:

Research analyst, Varinder Bansal  adds that Orchid Chemicals has issued 50 lakh warrants to promoters at Rs 202.58/sh in March, 2007 and the warrants will expire on Aug 30; 18 months from date of allotment. The promoters had to pay Rs 90 crore for exercising these warrants as 10% of money paid during allotment. The promoters stake will go up by around 7% on expanded equity.

There are 2 scenarios for Orchid. It can covert the 50 lakh warrants fully which amounts to 7% stake on expanded equity. But it will also have to arrange Rs 90 crore for 50 lakh shares. The promoters stake will go up from 15.8% to 22.8% and this will trigger an open offer and will require more cash.

It can also covert 34.65 lakh warrants without trigerring an open offer which will amount to 4.99% stake on expanded equity. It has to arrange for Rs 72.4 cr for conversion of 34.65 lakh warrants and  the promoters stake will go up from 15.8% to 20.79%.

Synergies between Ranbaxy & Orchid:

 

Mallika Baheti , Sharekhan feels that the Orchid stock is trading at pretty attractive levels even at the current price of Rs 220-odd; that it is currently hovering around at. She estimates a fair value of about Rs 375 for the company at about 16 times FY09 multiple.

 

Regarding the synergies with Ranbaxy, Baheti said. “Ranbaxy has traditionally been an aggressive participant in the US generic space. However, its capabilities are more limited to the non-antibiotic segment - the so called cardiovascular, the central nervous system, neurology. It does have a limited presence in the antibiotic space, specifically the Cephalosporin space where Orchid has developed a strong presence in. But the niche capabilities that Orchid can carry out in the US with its Cephalosporin antibiotics, the sterile injectables and the other high-end antibiotics and non-antibiotic products that it is targeting, Ranbaxy is currently devoid of, ” she said.

 

Baheti feels that essentially a takeover would be complimentary for Ranbaxy. “It would give it access to high-end technologies, high-end capabilities, lots of manufacturing assets that have been approved by regulatory authorities across the world, including the US FDA (Food and Drug Administration), the UK MHRA (Medicines and Healthcare products Regulatory Agency). So, we do see a lot of synergies between the two companies,” she added.

 

Baheti has priced Orchid at Rs 375 a share.

 

Rationale to buy Orchid:

 

Shivani Shukla , Industry Manager- Healthcare Practice, Frost & Sullivan said it makes strategic sense to invest or takeover a company like Orchid Chemicals as offers control over end-to-end of the value chain.

 

“For any pharmaceutical company-Ranbaxy or otherwise- it would make strategic sense for the buyer to invest or takeover a company such as Orchid. For a formulation company, it would mean having control over end-to-end of the value chain, including backend in form of Active Pharmaceutical Ingredients (APIs). In case of a company like Ranbaxy, control over end-to-end means control over margins which is a key in the generic play. In terms of infrastructure and expertise, the buyer would get a state-of-art approved facilities and expertise in API formulations and development capabilities,” Shukla commented.

Ranbaxy Labs stock price

On December 19, 2014, Ranbaxy Laboratories closed at Rs 617.45, down Rs 3.1, or 0.5 percent. The 52-week high of the share was Rs 697.50 and the 52-week low was Rs 306.05.


The company's trailing 12-month (TTM) EPS was at Rs 20.91 per share as per the quarter ended September 2014. The stock's price-to-earnings (P/E) ratio was 29.53. The latest book value of the company is Rs 25.82 per share. At current value, the price-to-book value of the company is 23.91.

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