Battle lines are being drawn in India’s pharmaceutical sector. A creeping acquisition has begun in the shares of Chennai-based Orchid Chemicals & Pharmaceuticals which has become vulnerable to acquisition after its share price fell steeply last month.
A firm called Solrex Pharmaceutical Co, which market sources say belongs to Ranbaxy Labs or its founders, has now garnered 9.54% stake in the company.
Orchid founder and managing director Kailasam Raghavendra Rao said he was determined to retain control over the company and would lean on support from institutional investors. But his options could be limited, since he owns only 17%. “I have not started this company to sell out,” an emotional Mr Rao told ET. He will be watched for his moves in the next few days.
When contacted, Ranbaxy managing director and CEO Malvinder Singh said, “I have no comment to make.” However, Mr Singh had earlier spoken of consolidation being the ‘buzzword’ in the industry and his company had been on the lookout for strategic stakes in the domestic market.
Orchid shares were beaten down mercilessly on March 17, when promoter holdings of about 7.5% were sold by stock dealers who had lent Mr Rao and his family money to buy those shares. A bearish pressure had caused the price to fall below a predetermined threshold, invoking margin calls that Mr Rao could not meet.
The Orchid founder incurred a personal loss of Rs 75 crore in the selloff and the shares lost 40%, though they have recovered ground since then. “I do not know the antecedents of Solrex and the events of the past few days have been too sudden to say anything. But I can tell you, I am here to stay,” Mr Rao said.
The buzz about Ranbaxy’s interest and a block deal of nearly one million shares, or 1.5% stake in the target firm, caused a spike in Orchid shares which gained 15.5% to close at Rs 207.15 on the BSE. Even after this, the company is trading at a low price-earning multiple of 7.2 compared with the industry average of 17.23.
Incidentally, the name ‘Solrex’ bears a close resemblance to Ranbaxy’s two business divisions ‘Solus’ and ‘Rexcel’, which were created in 2002 as part of the company’s restructuring programme. With Ranbaxy refusing to clarify, it was unclear whether Solrex could be a Ranbaxy unit or a firm floated by its promoters.
Analysts said that it made sense for Ranbaxy to have Orchid in its fold. “What Orchid brings on the table for Ranbaxy is its market standing in Cephalosporin (both sterile and oral). Orchid has created many assets in this regard over the past couple of years. Ranbaxy has products in anti-biotics and Orchid would help consolidate its position in this regard,” said Angel Broking vice-president (research) Sarabjit Kaur Nangra.
Pharma consultant and industry veteran Ajit Dangi said, “Orchid Chemicals has good API portfolio and manufacturing facilities. It should be complementary for Ranbaxy to acquire Orchid and enable the Indian pharma MNC to increase its market share.” However, another industry expert said that the investment could just be an attractive-buying opportunity rather than a strategic fit for the company.
Orchid reported Rs 866-crore revenues and a net profit of Rs 169 crore for the nine-month period ended December 2007. It has a return on capital of about 11% and a market capitalisation of Rs 1,400 crore.
Source: Economic Times