@ Market Cap of Rs. 3600 Cr, CMP 724
If I invert and see, Company is available at 4x P/S. Which is not at a discount from other generic API players.
But growth can be the differential here. There are triggers in place, but most of them might start playing out after 2-3 Q.
Managment is indicating a massive global slowdown in the antibiotics market, where both prices and volumes are under pressure. Overall, quantity of oral antibiotics exports has fallen by about 30%, while average export prices dropped by about 15% to 20%. They are unclear of the reason, assuming it’s channel de-stocking. However, until the exact cause is identified, the duration of this pain remains uncertain. Fact that they have held onto their gross margins in this market is a positive.
Since the company is concentrated in a single therapy (anti-infective) and, within that, a single sub-segment of cephalosporins, the risk of slowdown is amplified.
Speaking about the triggers –
- In early August, the company bought back the Enmetazobactam asset from its European partner, Allecra, acquiring global rights and the trademark Exblifep. The product has already been licensed in Europe, M. East and N. African markets. Previously, Orchid received high single-digit royalties, while Allecra received double-digit royalties from their partner in Europe. Now, Orchid will receive the full double-digit royalties. The patent expiry is still some time away (2034 for the US and 2036 for the EU), offering a good window to monetise the asset. But the catch is – Exact Commercial terms for this deal are not yet revealed. At the same time, because it was a solvency transaction Orchid managment will have exact details about the business only when the transaction is completed. Also to note, this is not a novel molecule, it is a new combination of ceph and an inhibitor to take care of drug resistance; other companies also have similar products – so how the market formation happens will have to be seen. US has approved the product but Allecra faced challenges entering the market and it remains to be resolved.
- The 7-ACA intermediate facility in Jammu will be going live by end FY26 and commercial by early FY27. This would be a fermentation based intermediate facility. Technology transfer has been completed and pilot batches have been done. However, scale-up will need close monitoring since the company lacks prior experience in fermentation. Dependancy on China for penicillin and cephalosporin intermediate was huge. Which was globally recognised as a risk during covid, the PLI scheme was announced to address that. If the execution is good, they could become a partner of choice during shifting supply chains. Their ability to compete with China remains uncertain.
- Dedicated API + injectable FDF facility for Cefiderocol (last line treatment), validation batches anticipated in late 2026 and a commercial launch expected in 2027.
- Building a branded franchise will involve a longer gestation period.
- The Dhanuka Labs merger has been approved, but completion is still some time away. In the near term, Dhanuka also face the same macro slow-down as Orchid. As a lower-margin business, it also carries the risk of recording losses if the slowdown continues for a few quarters.
Dhanuka has done a good turnaround of the company and is doing the right things for growth over the medium term, the stock could be under pressure in the short term due to head winds.
No position taken