Solrex close to open offer trigger for Orchid Chem

Solrex Pharmaceuticals, believed to be a Ranbaxy Laboratories-promoted company, has reportedly increased its stake in Chennai-based drug major Orchid Chemicals and Pharmaceuticals to 14.72 per cent — just short of the 15 per cent mark that will trigger an open offer to acquire the cephalosporin drug major.

A TV channel reported today that Solrex has increased its stake in Orchid to 14.72 per cent in bulk share purchase deals on Friday. The channel also said other Ranbaxy promoter group companies might have also garnered shares in Orchid.

According to the National Stock Exchange (NSE) data available yesterday, Solrex had 12.84 per cent stake in Orchid, all acquired in different deals after March this year.

The development could not be confirmed with the stock exchanges and Orchid. An official spokesperson of Orchid said he was yet to get details of the share purchase data of Orchid. Ranbaxy officials declined to comment on the developments.

A few days ago, Malvinder Mohan Singh, the managing director and chief executive officer of Ranbaxy, had stated that the company was against any hostile takeovers.

Orchid maintained that Solrex was understood to be an investment unit of Ranbaxy and the share purchases by Solrex were value picking rather than a takeover attempt.

Orchid’s Chairman and Managing Director K Raghavendra Rao has only 15.9 per cent stake in Orchid. In case of an open offer, one option before him is to utilise the warrants worth about Rs 50 lakh, which can be converted into a 7 per cent stake. This would increase Rao’s stake close to 23 per cent, said sources.

Reportedly, the Orchid management is in talks with financial institutions to convert the warrants and to rope in strategic investors to thwart the takeover attempts.

“We are observing the developments, but have not taken any decision on conversion of the warrants,” said the company spokesperson. Both Raghavendra Rao and Deputy Managing Director C B Rao are still away in Japan, as a part of the opening of a subsidiary of Orchid in Japan.

Life Insurance Corporation of India and United India Insurance Company hold 7.8 per cent and 2.48 per cent, respectively in Orchid.

Other large institutional investors in the company include Gazal Industrial Holdings (8.48 per cent), Macquarie Bank (5.13 per cent), Harpline (4.54 per cent) and Fidelity Trustee Company (2.66 per cent).

Orchid promoter to get FI support

K Raghavendra Rao, the promoter and the managing director of Chennai-based Orchid Chemicals and Pharmaceuticals Ltd, has managed to garner the support of large institutional investors to thwart a takeover attempt.

These institutions, which collectively hold 38 per cent in Orchid, have agreed to support Rao, company insiders told Business Standard.

“These are oral agreements and are usually not given in writing,” he said.

Counted with the 16 per cent held by Rao, his family and close associates, this will keep Orchid safely under Rao’s control.

Solrex (believed to be a company of the Ranbaxy promoter group), is known to have bought 12 per cent in Orchid so far, which is being seen as the first steps towards a hostile takeover of the company.

Life Insurance Corporation of India and United India Insurance Company hold 7.8 per cent and 2.48 per cent respectively in Orchid.

Other large institutional investors in the company include Gazal Industrial Holdings (8.48 per cent), Macquarie Bank (5.13 per cent), Harpline (4.54 per cent) and, Fidelity Trustee Company (2.66 per cent).

Industry observers said the large number of abbreviated new drug applications (ANDAs) filed by Orchid is one strong reason that might have motivated Solrex to take over the company.

These approvals allow companies to launch generic clones of drugs once the patent expires.

An Orchid spokesperson said the firm has 25 approved ANDAs and another 22 are awaiting approval by the US Food and Drug Administration.

The spokesperson also denied reports suggesting that Rao had roped in Prathap C Reddy, chairman of the Apollo Hospitals group, as a white knight to retain his control over Orchid. The hospital group’s spokesperson could not be reached to corroborate this.

No hostile takeovers: Ranbaxy

In an interesting twist to the Solrex-Orchid saga, Ranbaxy Laboratories today said it is against hostile takeover of any Indian pharmaceutical company.

Solrex Pharmaceuticals, which is believed to be an investment firm of the Ranbaxy promoters, has picked up a 12 per cent stake in Orchid Chemicals.

A top Ranbaxy executive told Business Standard today that the company is against any hostile takeovers and refused to either confirm or deny whether Solrex is indeed owned by promoters, Malvinder and Shivinder Singh.

He, however, said, Ranbaxy has not gone in for any hostile takeovers so far and its investments in domestic pharmaceutical companies such as Krebs Biochemicals and Industries, Jupiter Biosciences and Zenotech Laboratories were only strategic investments.

Industry analysts said the Singh brothers will adopt the same model for Orchid.

Orchid’s share prices, which went up 34 per cent in the last two trading days following reports of a possible creeping acquisition by Solrex, today fell 3.06 per cent on the Bombay Stock Exchange (BSE) to Rs 232.60 at close of trading.

Ranbaxy holds 14.9 per cent each in Jupiter Biosciences, a leading peptide manufacturer, and active pharmaceutical ingredients (API) maker Krebs Biochemicals, besides a 48 per cent stake in Zenotech Laboratories, a Hyderabad-based manufacturer with a good pipeline of cancer drugs and biopharmaceuticals.

It has strategic product supply and research and development alliances with all three companies.

Over the past two to three years, Orchid’s name had figured in most of the reported takeover attempts by overseas pharmaceutical companies like Teva of Israel, Novartis’s generic arm Sandoz and Pfizer.

Solrex buys buoy Orchid

The share price of Chennai-based Orchid Chemicals and Pharmaceuticals soared 15.83 per cent on the Bombay Stock Exchange today on reports of a possible takeover bid by Solrex Pharmaceuticals, a company believed to be controlled by the promoters of Indian pharma major Ranbaxy.

There were unconfirmed reports today of Solrex scaling up its stake in Orchid to 12.87 per cent from 9.54 per cent yesterday.

Orchid shares closed at Rs 239.95 against Rs 207.15 on Monday but the Ranbaxy scrip fell 2.71 per cent to close at Rs 470.75.

Ranbaxy refused to comment on the development and an Orchid spokesperson said, “We will not comment on speculation and are yet to get details on the bulk share purchaser.”

Solrex, which had a 4.62 per cent stake in Orchid earlier, bought 2.26 million shares on Friday, and 972,000 shares on Monday to increase its stake to 9.54 per cent.

The promoters of Orchid only hold 15.87 per cent, according to the latest available shareholding data. If Solrex crosses the 15 per cent threshold, it can make an open offer for a takeover under Sebi norms. The open offer will have to be made at Rs 236.34, Orchid’s average share price for the last six months.

Around a dozen institutional investors hold about 38 per cent in the company, Macquarie Bank Ltd (5.13 per cent), Life Insurance Corporation of India (4.91 per cent) and Harpline Ltd (4.54) among them. Orchid is banking on their support to counter the takeover attempt.

Orchid also has a $200 million Foreign Currency Convertible Bond (FCCB) issue that can be converted into shares, said sources.

Sources at financial institutions said they will adopt a wait-and-watch strategy. “Orchid Pharma has not written to us yet and we need time to study the whole thing. We need to see what value addition Ranbaxy will bring, what impact the takeover will have on our investments,” a source said.

“It is an insignificant thing for us. We have investments in several companies. When the time comes, we will decide. So far no one has written to us,” added another institutional shareholder.

A source close to the Ranbaxy management said Solrex was a personal family investment arm of the Ranbaxy promoter family and the investment in Orchid was more of a personal investment than a takeover attempt. But few are willing to buy that argument.

Religare, a Ranbaxy promoter group company that had sold its shares in Orchid recently, distanced itself from Solrex. “We have no connections with Solrex. Any information linking Religare to Solrex is incorrect,” the company’s CEO and Managing Director Sunil Godhwani said.

“It is definitely a hostile takeover attempt by Solrex. Orchid is a good company to buy and whoever takes over will be having management control of a Rs 2,400-crore company,” an industry expert commented.

Added Sarabjit Kaur Nagra, a pharmaceutical analyst with Angel Broking, “Orchid has made significant investments in world-class bulk drug manufacturing facilities in the last three years and it is emerging as a major player in the cephalosporin anti-bacterials and non-cephalosporin antibiotic products. This will help Ranbaxy access the strengths of Orchid, especially in the US and European markets.”

The 16-year-old Orchid has two manufacturing sites for active pharmaceutical ingredients (APIs) at Alathur near Chennai and at Aurangabad near Mumbai and three manufacturing sites for dosage forms at Irungattukottai and Alathur in Chennai. It also has two research and development centres at Sholinganallur and Irungattukottai near Chennai.

Orchid's Rao says learnt a lesson in choppy markets

Kailasam Raghavendra Rao, founder and MD of Chennai-based drugmaker Orchid Chemicals & Pharmaceuticals, has said he repents borrowing money to buy more shares in his company and that he will never do it again. Mr Rao, who incurred a personal loss of Rs 75 crore when his lenders sold off 7.5% stake from his family's holdings on Monday, also denied market talk that the company had suffered forex losses.

But the bigger worry for Mr Rao would now be the vulnerability of the company for a takeover, as its market value at a mere Rs 750 crore is just a third of what it was just two months ago. With only 17% stake, the cash-strapped founders may find it difficult to resist such an eventuality, some market sources said. Ironically, it was this vulnerability that forced Mr Rao to try raising his stake with borrowed money.

Investors were rattled again on Tuesday as Orchid shares lost a further 10.3% to close at Rs 113.95 on BSE. “It has hurt me. And it has hurt so many other stakeholders,” Mr Rao, a first-generation entrepreneur and son of a railway clerk, told ET. “Borrowing to raise stake was an inappropriate thing to do.

It is a big lesson for me.” In March-April 2007, Mr Rao said he borrowed around Rs 85 crore from Indiabulls and Religare Finvest to raise the promoter stake from 17% to 24%. In an improvised system called promoter funding, brokerages lend money to company founders against a pledge of their shares. Indiabulls typically lends Rs 25-33 against shares worth Rs 100. Religare lent Mr Rao half the value.

“There are thresholds specified when the margin calls would come into play if the price falls,” Indiabulls CEO Gagan Banga said. Mr Rao had repaid around Rs 5 crore to these firms, but the market plunge invoked the thresholds last Friday. The two firms asked him to pay up the margins, which Mr Rao could not manage by Monday.

“I was in a village near Bangalore and the suddenness of the whole thing took me by surprise,” he said. When the stock fell further, partly as the beleaguered Bear Stearns sold off a million shares, the brokerages sold off a good portion of the pledged shares and recovered their money. Mr Rao's family lost about Rs 150 per share.

While Mr Rao has cleared his dues to these two firms, he still owes nearly Rs 65 crore to FIs and his current stake is pledged to them. “It is my priority to repay all those loans with my salary, dividend and profit share,” Mr Rao said.

Analysts said the bitter episode has shaken investor confidence on the integrity of the management and the stock is bound to reflect that. “While the company's operations are OK, this thing will set a wrong precedent. People will ask why promoters have dabbled in it,” said Sarabjit Kour Nangra, VP for research at Angel Broking.

Orchid's consolidated revenues for Q3 ended December 2007 rose 40% to Rs 347.38 crore while net profit rose 94% to Rs 49.96 crore. At Tuesday's price, Orchid shares were trading 7.2 times the company's expected 2007-08 earnings.

Analysts have been citing strong earnings visibility over the next two years and new product launches as reasons for their optimism on the stock. Just two weeks ago, LIC bought an additional 2.3% in the company to raise its stake to 7.8%.

Around the same time, Citigroup Global Markets had set a target price of Rs 386 for the stock with a ‘buy' recommendation. Domestic and foreign institutions hold more than 35% in the company while foreign companies hold about 15%.

Orchid gets USFDA nod for non-antibiotic drug

Chennai-based drug major Orchid Chemicals & Pharmaceuticals has received approval from US Food and Drug Administration (FDA) for its abbreviated new drug application (ANDA) for Granisetron Hydrochloride tablets in one mg dosage.

According to a release issued by Orchid to the BSE today, it is the first Indian company to get approval for the non-antibiotic product. Granisetron hydrochloride, known by the brand Kytril of drug major Roche, is used in the treatment of side effects like nausea related to chemotherapy.

The US drug regulator has given genric approvals for the drug to companies like Mylan, Teva, Barr Pharmaceuticals and Abraxis. Cipla also has a tentative approval from USFDA to manufacture and market the drug.