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Wockhardt: Boosted by acquisitions
Feb 22, 2008

Performance summary
  • Revenues grow by 54% YoY during CY07 led by strong performance in Europe and in the US backed by acquisitions.
  • Growth in Europe was driven by the contribution from Pinewood Laboratories (Ireland) acquired in October 2006 and from Negma (France) acquired in May 2007.

  • EBDITA margins expand by 0.9% for the fiscal owing to a considerable reduction in raw material, R&D and other expenditure (all as percentage of sales).

  • PAT grows by a relatively slower 27% YoY (if one excludes the extraordinary expense incurred in CY06) and is impacted by lower other income and higher interest and tax expenses.

Financial performance: A snapshot
(Rs m) 4QCY06 4QCY07 Change CY06 CY07 Change
Net sales 5,264 7,620 44.8% 17,290 26,532 53.5%
Expenditure 4,043 5,719 41.5% 13,287 20,141 51.6%
Operating profit (EBDITA) 1,221 1,901 55.7% 4,003 6,391 59.7%
Operating profit margin (%) 23.2% 24.9%   23.2% 24.1%  
Other income 78 37 -52.6% 190 110 -42.1%
Interest 115 492 327.8% 26 974 3646.2%
Depreciation 212 236 11.3% 621 785 26.4%
Profit before tax 972 1,210 24.5% 3,546 4,742 33.7%
Extraordinary item - -   (604) -  
Tax 101 155 53.5% 529 917 73.3%
Profit after tax /(loss) 871 1,055 21.1% 2,413 3,825 58.5%
Net profit margin (%) 16.5% 13.8%   14.0% 14.4%  
No. of shares (m) 109.4 109.4   109.4 109.4  
Diluted earnings per share (Rs m)         35.0  
P/E ratio (x)*         10.1  
* on a trailing 12-month basis

What has driven performance in CY07?
  • Wockhardt’s domestic business registered a decent 16% YoY growth in CY07, higher than the industry growth rate of 13%. This growth was largely driven by the company’s focus on high-end niche therapeutic areas, strengthening its presence in existing businesses and new product launches. While the oral anti-diabetic portfolio registered an impressive 52% growth during the year, the infant foods business grew by 23% YoY. Wockhardt has also been active on the product in-licensing front to keep up the pace of new product launches in the domestic market and launched 5 in-licensed products in CY07.

    Revenue: Geographical mix

    (Rs m) 4QCY06 4QCY07 Change CY06 CY07 Change
    India 1,659 1,825 10.0% 6,764 7,812 15.5%
    Europe 2,919 3,748 28.4% 7,150 14,095 97.1%
    US 307 1,147 273.6% 1,658 2,718 63.9%
    Rest of the world (ROW) 350 898 156.6% 1,717 1,906 11.0%
    Total 5,235 7,618 45.5% 17,289 26,531 53.5%

  • Revenues from the US business grew by a healthy 64% YoY during CY07 led by the ramp up in product launches in the market and the acquisition of Morton Grove. The company received 13 new ANDA approvals in CY07, including 5 injectables and 4 NDDS and launched 11 products during the year. Wockhardt now has 39 ANDAs pending approval, which comprises of 25% injectables, 4 NDDS, 4 liquid orals with focus on less competitive and difficult to replicate products with over US$ 37 bn in brand value.

  • Another development during the year was Wockhardt’s acquisition of Morton Grove in the US, a leading liquid generic and speciality dermatology company for US$ 38 m. Morton Grove had sales revenues of US$ 52 m with a portfolio of 31 products, 13 of which enjoy the top position in the market. Around one third of Morton’s revenues come from the branded ‘Lindane’ range of dermatological products. Having said that, Morton Grove has not been performing well for the last two years due to lack of management focus and new product launches and reported a loss at the EBDITA level to the tune of US$ 4 m. Wockhardt is looking to turnaround this company in the next 6 to 9 months through topline growth and cost rationalisation measures. This acquisition is expected to strengthen Wockhardt’s presence in the dermatology space in the US generics market.

    Revenue: Business mix

    (Rs m) 4QCY06 4QCY07 Change CY06 CY07 Change
    Formulations 4,855 7,242 49.2% 15,611 24,938 59.7%
    Bulk 410 377 -8.0% 1,679 1,593 -5.1%
    Total 5,265 7,619 44.7% 17,290 26,531 53.4%

  • Europe is at present the largest contributor to Wockhardt’s revenues (54%) and reported a splendid 97% YoY in CY07. This growth was primarily driven by a healthy performance across the existing geographies of the UK and Germany, new product launches and the newly acquired businesses of Pinewood Laboratories (Ireland) and Negma (France). The UK business grew by 14% YoY led by the generics and hospitals businesses and its strong relationship with Amylin (contract manufacturing for the product ‘Byetta’). Strong comeback was witnessed in the German business, which grew by a healthy 16%, which is commendable given that the German generics market declined by 10%.

  • Operating margins during the quarter improved by 0.9% owing to the fall in raw material, R&D and other expenditure (as percentage of sales). Wockhardt was also able to improve the EBDITA margins of Pinewood, Ireland further contributing to the margin expansion. While the bottomline grew by 59% YoY during the year, if one excludes the one-time expense that Wockhardt incurred in CY06 (related to acquisition expenses and chargebacks in the US) then the bottomline grew by a much slower 26% YoY. This was due to a steep rise in interest and tax expenses and substantial reduction in other income.

What to expect?
At the current price of Rs 353, the stock is trading at a price to earnings multiple of 8.6 times our estimated CY09 earnings. In the domestic market, biopharmaceuticals and in-licensing will be the key growth drivers for Wockhardt going forward. As far as Europe is concerned, Wockhardt will look to create value from the Pinewood acquisition by reducing operating costs, sourcing products globally and leveraging on its existing product basket. Besides this, the acquisition of Negma is also expected to widen Wockhardt’s product portfolio and strengthen its presence in the European region.

In the US market, besides stepping up the pace of product launches, the company's focus on niche and difficult to replicate products will be the key due to relatively lesser competition in these areas. On the biotech front, the company’s focus will be on insulin and it has made an IND filing for this product in the US and will be looking to make a filing in the EU by February 2008. As regards Morton Grove, Wockhardt is looking to achieve breakeven in the next 6 to 9 months and is aiming for Morton to achieve margins at Wockhardt’s level in the next 24 to 36 months. Pricing pressure in the US and German markets and slower growth in the rest of the world markets would continue to remain a cause for concern going forward. Overall, we maintain our positive view on the stock.

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