Upsized CB for Indian drug maker

Orchid Chemicals raises $175 million to grow its portfolio of drugs. Conversion premium set at 30%.
Indian drug maker Orchid Chemicals & Pharmaceuticals became the latest company to take advantage of the current strong demand for convertible bonds on Monday when it set itself up for raising the equivalent of half its market capitalisation through an upsized CB.

The $400 million-market cap company is expected to raise a total of $200 million after it increased the base size of its five-year, zero-coupon deal to $175 million from $125 million, and kept the greenshoe at $25 million, a source close to the deal said last night.

The offer, which was arranged by Merrill Lynch, followed on the back of a small pre-deal roadshow during which the management did 10 meetings or calls with potential investors. The roadshow gave the little-known company, which makes the active pharmaceutical ingredient that goes into pills, an opportunity to explain its business as well as its growth plans in detail and this undoubtedly contributed to the strong demand for the issue.

It wasnÆt the companyÆs first foray into international markets, however. In October 2005 it raised $82.6 million from a combined CB and GDR issue arranged by Citigroup. The zero-coupon bonds, which accounted for about half the total proceeds, were priced with a 25% conversion premium.

According to the source, nine of the 10 meetings resulted in actual orders and overall about 50 investors came into the book. The total demand amounted to about $350 million, or twice the final base size. Approximately 40% of this was outright demand (as opposed to arbitrage-related), which suggest that this was indeed a very ôstory-basedö deal.

Close to 20% of the demand came from European investors, while most of the rest was generated out of Asia.

However, the book wasnÆt without price sensitivity and had the company chosen to price the CB in the middle of the yield and conversion premium ranges, it would not have been able to increase the size. As it was, Orchid elected to go for the greater money option and the yield was fixed at the very wide end of the 6.5% to 7.25% range.

The conversion premium was set at 30% over MondayÆs closing price of Rs267.95 on the National Stock Exchange of India after being offered in a range between 30% and 37.5%. There is an issuer call after three years, subject to a hurdle of 130%, to speed up conversion if the share price continues to perform.

The stock has rallied 37% so far this year, but is still down about 32% from its 2006 peak of Rs394.45 that it hit in April.

The CBs were marketed at a credit spread of 300 basis points and with a 5% stock borrow cost. They offer full protection for future dividends as well as for a proposed issue of warrants to the promoter group that is currently awaiting shareholdersÆ approval. At the final terms, this gave a bond floor of 95.2% and an implied volatility of 24.5%, which compares with a 100-day historic volatility of 28%.

The money raised will be used to cover the companyÆs large capital expenditure needs as its plans to steadily expand its portfolio of drugs, and to repay some outstanding debt. Orchid isnÆt primarily involved in the research and development of pharmaceuticals from scratch, but specialises in developing ways to manufacture drugs that are about to come out of their patents.

On its Web site, however, the company does note an intention to transform itself from a player focused predominantly on API to a more integrated and regulated market player that is also involved in drug discovery. ôYour company, going forward is focusing on expanding the niche generics pipeline further and unlocking the value of innovation through drug discovery,ö it says.

According to the source, Orchid has a long list of pharmaceutical products that it plans to take from the developing stage through to clinical trials before their patents expire, in order to be ready to sell them once they become available for generic production.

ôThe company is now working on drugs that come out of their patents in three years or so,ö the source says, noting that the company currently supplies 16 different drugs to the market compared with eight for its closest competitor. Other companies involved in this business include Novartis, Ranbaxy Laboratories and Lupin.
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