WOCKHARDT

Result Update

Key Data

 

CMP	Rs 268
Date	April 4th 2008
Sector	Pharmaceuticals
Face Value	Rs.5
BSE Code	532300
52 Week H/L	Rs 450/ 323
Market Cap	Rs 2933 Cr

Investment Rationale

Wockhardt is a global, pharmaceutical and biotechnology company that has grown by leveraging two powerful trends impacting the world of medicine - globalization and biotechnology. The company has posted strong quarterly results with its revenue increasing by 69 percent to Rs738.1crore YoY .The Indian business of the company continues to rise up the ladder and delivered a growth of 8% during the quarter which saw the launch of 9 products. The operating margin for the quarter has shown a significant increase of 230 basis points to 24.5 percent YoY basis. The expenditure on R&D has reduced by 30.7percent to Rs11.7 crore compared to the same quarter last year.

Key Developments

Growth through inorganic route

The company has recently acquired Morton Grove pharmaceuticals Inc. a leading liquid generic and speciality dermatology company in the US having sales revenue of US $52 mn. This strategic acquisition provides Wockhardt entry into the US generic market with a portfolio of 31 products, of which 13 are the market leaders. This acquisition will boost the wockhardt’s US revenue by providing a complete range of dosage forms right from tablets, capsules, liquids to injectibles. Wockhardt now has a strong position in the liquid market in USA and UK.

Wockhardt signs in-licensing agreement with Italian firm to strengthen Pain relief portfolio

Pharmaceutical and biotechnology major Wockhardt Limited has signed an in-licensing agreement with the Italy-based Gnosis SpA to market SAMe (S-adenosyl methionine), a process patented product for osteoarthritis. This will be marketed under the brand name SAMMY. The Indian market is worth Rs 270 crores for this product.

Financials

Strategic acquisition led to the robust performance

Powered by acquisitions and European business, the pharmaceutical and biotech major Wockhardt posted a 23 per cent jump in net profit to Rs 106.9 crore in the fourth quarter ended December 31, 2007, as against Rs 87 crore in the quarter ended December 31, 2006. The total income increased by 43.36 per cent to Rs 765.7 crore from Rs 534.1 crore in the previous year’s quarter. For the year ended December 31 2007, the company reported a net profit of Rs 385.8 crore, 60 per cent more than a year ago.

Valuations

Wockhardt is quoting at PER of 13.7x on consolidated TTM earnings On EV to Sales and EV to EBITDA basis, the stock is trading at 2.5x and 11.3x respectively.

Industry Scenario

The Indian pharmaceutical industry is a US$ 10bn industry registering a growth of 8%-9% annually. Indian pharma industry which manufactures around 8% of the worlds drugs ranks 4^th in terms of Volume and 13^th in terms of value. Post GATT, the entry of foreign multinationals has provided huge opportunities for Indian manufacturers and exporters. According to the Mckinsey report, Indian pharmaceutical industry will triple to US$20 billion by 2015 and move into the world’s top-10 pharmaceuticals markets. This implies a compounded annual growth rate of 12.3 per cent. This growth will be materially higher than the annual growth rate of 9 per cent witnessed during 2000 to 2005.The absolute growth of US$14 billion will be next to the growth potential of the US and China, and in the same league as the growth in Japan, Canada and the UK. Generics will continue to dominate, while patent-protected products are likely to constitute 10 per cent of the market within this timeframe.

The product patent laws coming into effect in India post 2005 have bolstered the confidence of foreign companies and provided opportunities for Indian industry to develop and launch new molecules in domestic market in joint ventures with foreign entrants. The exports figure of pharma sector in FY 2005-06 at US $4.81bn reflects Pharma “Sunrise” industry of Indian economy also such strong growth in exports would be facilitated by the fact that several branded products are slated to lose patent protection in developed markets in the coming years. e.g. in the US drugs worth $40 billion and in Europe drugs worth $25 billion will go off patent by 2007-08, which will provide adequate growth opportunities for Indian drugs manufacturers operating in the generic drug markets. The industry is graduating from a total generics market to building a segment of novel, patented products developed indigenously, providing huge potential for further growth.

The Indian pharmaceutical market has potential for tremendous growth with a burgeoning middle-class of around 300-400 million people that have higher healthcare expectations. In the long run, affordability and awareness are expected to increase and Indians are expected to be able to afford the best medicines.

Therefore, overall, the outlook on the Indian pharmaceutical sector is positive.

Company Background

Wockhardt Limited is global research and technology oriented pharma major based out of India that’s has an active multidisciplinary R7D programme. It has been one of the frontrunners in biotechnology research in the country. The company was also among the first to sense to opportunities for generic pharmaceuticals in Europe. Wockhardt Limited has presence in inflammation and pain, anti-infective, cough syrups, corticosteroids and medical nutrition.

Wockhardt today, is distinguished by a strong and growing presence in the world’s leading markets, with more than 65% of its revenue coming from Europe and the United States. Wockhardt’s market presence covers formulations, biopharmaceuticals, nutrition products, vaccines and active pharmaceutical ingredients (APIs).

The Company has its headquarters in India, and has

Ø 14 manufacturing plants in India, UK, Ireland and France

Ø Subsidiaries in US, UK, Ireland and France

Ø Marketing offices in Africa, Russia, Central and South East Asia.

Wockhardt has a strong track record in acquisition management, with five successful acquisitions in the European market. These acquisitions have strengthened Wockhardt’s position in the high-potential markets of Europe, and have expanded the global reach of the organization.

 

Wockhardt’s manufacturing facilities in India, UK, Ireland and France have the approval of major regulatory bodies, including US FDA and UK’s MHRA, with capabilities for both Finished Dosage Formulations and APIs. The output includes

Ø Steriles (Injectables)

Ø Biopharmaceuticals

Ø Orals (Tablets & Liquids)

Ø Topicals (Creams & Ointments)

Developments and Impact

Growth through inorganic route

The company has recently acquired Morton Grove pharmaceuticals Inc. a leading liquid generic and speciality dermatology company in the US having sales revenue of US $52 mn. This strategic acquisition provides Wockhardt entry into the US generic market with a portfolio of 31 products, of which 13 are the market leaders. This acquisition will boost the Wockhardt’s US revenue by providing a complete range of dosage forms right from tablets, capsules, liquids to injectibles. Wockhardt now has a strong position in the liquid market in USA and UK.

Wockhardt signs in-licensing agreement with Italian firm to strengthen Pain relief portfolio

Pharmaceutical and biotechnology major Wockhardt Limited has signed an in-licensing agreement with the Italy-based Gnosis SpA to market SAMe (S-adenosyl methionine), a process patented product for osteoarthritis. This will be marketed under the brand name SAMMY. The Indian market is worth Rs 270 crores for this product.

Wockhardt to market innovative Zindaclin cream

Wockhardt Limited has signed an in-licensing agreement with Crawford Healthcare, UK to market Zindaclin, a patented ‘Once-a-day’ topical application for Acne. Zindaclin is the first ‘Once-a-day’ acne antibiotic to be launched in India. This licensing deal follows the launch of Vitix & Viticolor, patented products from LSI & Crawford of UK respectively, for the treatment of Vitiligo in the Indian market. The Indian market is worth Rs 1680 million for this product.

Wockhardt gets US FDA nod to enter the US$ 2.6 billion Norvasc market

Wockhardt is all set to launch Amlodipine tablets in the US market. The tablets to be marketed are in strengths of 2.5mg, 5mg and 10mg Amlodipine besylate, which is used for treating hypertension and other related cardiac ailments. Amlodipine is the generic name for the brand Norvasc, sold in the US by Pfizer Inc. Wockhardt is gaining a very strong position in several other cardiovascular products, like Enalapril and Captopril. With Amlodipine, the company is expecting to reinforce its robust cardiovascular portfolio. As per IMS, the US market for Amlodipine tablets is about $2.6 billion equivalent to 1.7 billion tablets.

Financials

 

(Rs. Crore)

 

 

Particulars	Quarter Ended			Year Ended
	Q4 FY07	Q4 FY06	% Change	FY07	FY06	% Change
Gross Sales	762.0	526.4	44.8%	2653.2	1728.6	53.5%
Excise Duty	0.0	0.0	-	0.0	0.0	-
Net Sales	762.0	526.4	44.8%	2653.2	1728.6	53.5%
Total Expenditure	571.9	404.3	41.5%	2014.1	1350.8	49.1%
EBIDTA	190.1	122.1	55.7%	639.1	377.8	69.2%
Other Income	3.7	7.8	-52.6%	11.0	19.0	-42.1%
Depreciation	23.6	21.1	11.8%	78.5	62.9	24.8%
EBIT	170.2	108.8	56.4%	571.6	333.9	71.2%
Interest	49.2	11.5	-	97.4	2.7	3507.4%
PBT	121.0	97.3	24.4%	474.2	331.2	43.2%
Tax	15.5	4.6	237.0%	91.7	23.6	288.6%
Deferred Tax	0.0	4.4	-100.0%	0.0	26.0	-100.0%
FBT	0.0	1.1	-100.0%	0.0	3.3	-100.0%
Reported Profit After Tax	105.5	87.2	21.0%	382.5	278.3	37.4%
EPS (Unit Curr.)	9.6	8.0	21.0%	35.0	25.5	36.9%
Equity	54.7	54.7	-	54.7	54.5	0.4%
EBIDTM(%)	24.9%	23.2%	7.6%	24%	22%	10.2%
EBITM(%)	22.3%	20.7%	8.1%	22%	19%	11.5%
PATM(%)	13.8%	16.6%	-16.4%	14%	16%	-10.5%

Financial Analysis

Strategic acquisitions to improve the performance

Powered by acquisitions and European business, the pharmaceutical and biotech major Wockhardt posted a 23 per cent jump in net profit to Rs 106.9 crore in the fourth quarter ended December 31, 2007, as against Rs 87 crore in the quarter ended December 31, 2006. The total income increased by 43.36 per cent to Rs 765.7 crore from Rs 534.1 crore in the previous year’s quarter. For the year ended December 31 2007, the company reported a net profit of Rs 385.8 crore, 60 per cent more than a year ago. Total income rose by 52.4 per cent from Rs 1,748 crore in 2006 to Rs 2,664.2 crore. The operating margins improved by 170 basis points to 24.9 per cent in the December quarter and 100 basis points to 24.1 per cent for the year 2007. ‘The value creation in newly acquired Pinewood and Negma in Europe, contributed to the growth in profits.

Valuations

Wockhardt is quoting at PER of 13.7x on consolidated TTM earnings On EV to Sales and EV to EBITDA basis, the stock is trading at 2.5x and 11.3x respectively.

 

Risk

Ø Currency appreciation may lead the margins to shrink

Ø Increase in the price of Raw Materials thereby increasing the cost

Growth

Ø The strategic acquisition of Morton Grove will provide the company entry into the US generic market

Ø Increased focus in therapeutic areas and establishing base in new and niche therapy areas through strategic in-licensing

•  
• Have largest marketing network and still working to increase it to the highest
• True Value business model generating 12-15 percent of Volume and expected to do well as well in future.
• Maruti has new production management system, to increase productivity.
• Competitive pricing holds the key for the success of new products.
• Exports of variant products doing well and still expected to increase the presence in the International Market.

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