Stock Idea - Orchid Chemicals & Pharmaceuticals

Recommendation: Buy (again!!)

CMP = Rs 256 (at the time of this recommendation)

Price target: Rs 300

Key points:

  • Orchid Chemicals has entered into a collaborative drug discovery deal with US-based global pharmaceutical major, Merck & Co. As per the deal, Orchid would be undertaking the late-stage development and manufacture of an anti-coagulant drug candidate initially discovered and developed through Phase I clinical trials by Merck. Towards this, Orchid has acquired a majority stake in Diakron Pharmaceuticals, a US-based drug discovery and development company, which has an exclusive license agreement with Merck for the compound.
  • Orchid plans to further develop the drug up till Phase II (a) clinical studies and then outlicense it to a global pharmaceutical company for further development and commercialisation, sometime in FY2010. The company will conduct a 25-30-patient Phase II (a) study on the compound which is estimated to cost around $4 million.
  • Orchid’s consolidated profits would take a $2-3 million hit due to an increase in the R&D spend on this study. However, the deal is a significant milestone in Orchid’s R&D efforts, as it vindicates Orchid’s R&D capabilities, and could pave the way for more such collaborative drug discovery deals in the future. Orchid would also gain from Diakron's worldwide distribution rights once drug is launched commercially.
  • At the current market price of Rs 256, Orchid is discounting its FY2009E earnings by 15.7x and its FY2010E earnings by 11.9x.
  • I maintain a very positive and Buy recommendation on this stock with a price target of Rs 300.

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