Sharekhan Research is bullish on Orchid Chemicals and has maintained buy rating on the stock with target price of Rs 390.

Sharekhan Research report on Orchid Chemicals & Pharmaceuticals:

Key points

Orchid Chemicals & Pharmaceuticals (Orchid) has received approval from the US Food and Drug Administration (USFDA) for its abbreviated new drug application (ANDA) for Cefepime injection.

Cefepime injection is a life-saving Cephalosporin antibiotic drug used in hospitals. The brand product had recorded sales of $190 million in December 2006. The patent for the product has already expired.

Since there will be only two players in the market including the innovator, Orchid will enjoy a near-exclusivity situation with this product and Apotex, through its strong marketing prowess, will be able to capture a healthy market share to the tune of 50-60%. Besides, with the entry of just one player, the market is also unlikely to get eroded beyond 20-30%.

We believe that Cefepime injections will generate USD 18.3 million in revenues for six months of FY2008 (from July 2007-March 2008) and USD 36.6 million in revenues in FY2009. This will translate into incremental earnings of Rs2.6 per share and Rs5.3 per share in FY2008 and FY2009 respectively, on a fully diluted basis.

At the current market price of Rs 253, the stock is trading at 10.1x its estimated FY2008 earnings, on a fully diluted basis. Based on the FY2007 performance of the company, the outlook provided by the management and the recent news flow relating to the company, we are reviewing our estimates for Orchid and will come out with an update shortly. In view of the bright prospects for the company, we retain our positive stance on the stock and maintain our Buy call with a price target of Rs 390.

Event

Orchid has received approval from the USFDA for its ANDA for Cefepime injection. About the product Cefepime injection is a life-saving Cephalosporin antibiotic drug used in hospitals. It is the generic version of Bristol Myer Squibb's Maxipime and is available in three dosage strengths: 500 milligram/vial, 1 gram/vial and 2 gram/vial. The brand product had recorded sales of USD 190 million in December 2006. The patent for the product has already expired.

Competitive landscape

Orchid is the first generic player to have received approval for its ANDA relating to Cefepime injections. Though the product has been generic for a few years now, there is no generic version of the product available in the USA, as the product requires complex manufacturing processes with special technological expertise. Even now, there are no other players in this market apart from Orchid and the innovator, Bristol Myers Squibb. Further, there is not much likelihood of anyone entering the space in the next two years, since there is no drug master file filing with the USFDA apart from that of Orchid for the product.

Implications for Orchid

The company has already started supplying the product to its partner, Apotex, who will be distributing the product in the USA. Since there will be only two players in the market including the innovator, Orchid will enjoy a near-exclusivity situation with this product and Apotex, through its strong marketing prowess, will be able to capture a healthy market share to the tune of 50-60%. Besides, with the entry of just one player, the market is also unlikely to get eroded beyond 20-30%. Based on the above, we believe that Cefepime injections will generate USD 18.3 million in revenues for six months of FY2008 (from July 2007-March 2008) and USD 36.6 million in revenues in FY2009. We also believe that the low competition will allow Orchid to make healthy margins of 30-35% on the product, thus generating profits of USD 6.4 million and USD 12.8 million in FY2008 and FY2009 respectively. This will translate into incremental earnings of Rs 2.6 per share and Rs 5.3 per share in FY2008 and FY2009 respectively, on a fully diluted basis.

Valuation & view

With a slew of new product approvals, Orchid's initiatives in the USA seem to be gaining momentum. The latest product approval is a big product opportunity for Orchid in the USA and indicates the kind of scale Orchid's US business is likely to reach over the next two to three years. Orchid has till date filed 40 ANDAs comprising 29 antibiotic and 11 non-antibiotic products, of which only 19 have been approved. With a strong pipeline of ANDAs pending approval, we expect strong traction in the company's US business. At the current market price of Rs 253, the stock is trading at 10.1x its estimated FY2008 earnings, on a fully diluted basis. Based on the FY2007 performance of the company, the outlook provided by the management and the recent news flow relating to the company, we are reviewing our estimates for Orchid and will come out with an update shortly. In view of the bright prospects for the company, we retain our positive stance on the stock and maintain our Buy call with a price target of Rs 390.