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Wockhardt: European effect!

Feb 26, 2007

Performance summary
Wockhardt has announced strong results for the fourth quarter and year ended December 2006. Strong revenue growth from Europe and India has led to the robust growth in topline for both the periods under review. While the company has maintained its operating margins, bottomline for CY06 has declined largely due to the extraordinary expense incurred during the year (expenses related to inorganic growth initiatives in the US market). Excluding these one-off costs, the bottomline has clocked a strong 17% YoY growth during the fiscal.

(Rs m) 4QCY05 4QCY06 Change CY05 CY06 Change
Net sales 3,662 5,264 43.7% 14,130 17,290 22.4%
Expenditure 2,812 4,043 43.8% 10,844 13,287 22.5%
Operating profit (EBDITA) 850 1,221 43.6% 3,286 4,003 21.8%
Operating profit margin (%) 23.2% 23.2%   23.3% 23.2%  
Other income 78 78 0.0% 180 190 5.6%
Interest - 115   95 26  
Depreciation 98 212 116.3% 426 621 45.8%
Profit before tax 830 972 17.1% 2,945 3,546 20.4%
Extraordinary item - -   - (604)  
Tax 101 101 0.0% 374 529 41.4%
Profit after tax /(loss) 729 871 19.5% 2,571 2,413 -6.1%
Net profit margin (%) 19.9% 16.5%   18.2% 14.0%  
No. of shares (m) 109.2 109.4   109.2 109.4  
Diluted earnings per share (Rs m)         20.2  
P/E ratio (x)*         16.5  
* on a trailing 12-month basis            

What is the company’s business?
Wockhardt Ltd, a subsidiary of Khorakiwala Holdings and Investments Pvt. Ltd (75% stake), is one of the leading domestic pharmaceutical companies with strong presence in the lifestyle segment and a growing focus on biotechnology. With acquisitions in the international markets, the company has demonstrated its growing global ambitions. During CY06, Wockhardt derived 61% of its revenues from non-India regions (63% in CY05). Wockhardt has a subsidiary in the UK, which holds 100% in CP Pharma and Wallis Laboratories. The company has acquired ‘Esparma GmbH’ in Germany and has set up presence in Brazil and the US. The company spent about 3.5% of consolidated revenues on R&D in CY06 and has proven its R&D capabilities by indigenously developing and launching Biovac-B (Hepatitis-B vaccine), Wepox (Erythropotein) and Wosulin (human insulin).

What has driven performance in CY06?
The Indian scenario: Wockhardt’s domestic business registered a robust 28% YoY in CY06. 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. Wockhardt’s key product portfolios i.e., diabetology and nephrology reported strong growth rates of 15% YoY and 41% YoY respectively. It must be noted that during the quarter, Wockhardt acquired Dumex India, with its two flagship brands ‘Protinex’ and ‘Farex’ in a bid to augment its nutrition portfolio. The company also entered into three in-licensing arrangements during the year with LSI and Crawford Healthcare (both UK based companies) and with the Indian company Zydus Cadila.

Revenue: Geographical mix
(Rs m) 4QCY05 4QCY06 Change CY05 CY06 Change
India 1,359 1,658 22.0% 5,274 6,764 28.3%
US 272 337 23.9% 1,498 1,658 10.7%
Europe 1,478 2,919 97.5% 5,429 7,150 31.7%
Rest of the world (ROW) 553 350 -36.7% 1,929 1,718 -10.9%
Total 3,662 5,264 43.7% 14,130 17,290 22.4%

US – Picking up pace: Revenues from the US business grew by a relatively slower 11% YoY during the year. While the performance in 1HCY06 was subdued, a significant ramp up in the ANDA program in 2HCY06 has been instrumental in contributing to the growth from this region for the year. The company received 8 approvals during the year, which included 3 sterile products. Wockhardt now markets 15 products in the US market. Amongst major product launches, the company launched ‘Ondansetron’ on day 1 of approval. All in all, Wockhardt filed 26 ANDAs and 10 DMFs with the US FDA during the year and, as of date, has 25 plus ANDAs pending approval. Besides this, the company also managed to increase the market share in all its major products during the year.

Revenue: Business mix
(Rs m) 4QCY05 4QCY06 Change CY05 CY06 Change
Formulations 3,314 4,854 46.5% 12,476 15,611 25.1%
Bulk 348 410 17.8% 1,654 1,679 1.5%
Total 3,662 5,264 43.7% 14,130 17,290 22.4%

Europe – The strongest of them all: The 32% YoY revenue growth clocked by the European region during CY06 was primarily led by the acquisition of the Irish company Pinewood Laboratories. The UK business grew by 12% YoY largely driven by 11 new product launches during the year. Wockhardt has entered into a contract manufacturing agreement with Amylin for the supply of the latter’s anti-diabetic drug ‘Byetta’ and this has also largely contributed to the growth of the UK business. Wockhardt’s performance in the UK region is commendable, given the fact that its peers in this region have witnessed a decline in revenues on account of severe pricing pressures. The German business, which was affected in the previous three quarters owing to sharp price cuts under the new regulations impacting sales, showed some signs of revival in the fourth quarter, which is an encouraging sign. Wockhardt launched 3 new products during the year in this market.

Stable margins:Operating margins during the year were maintained at the same level as last year led by control over its raw material costs. Increase in the size of the field force to boost its domestic business has led to the rise in staff costs. Dumex India achieved breakeven within 6 months of its acquisition in July 2006 and is expected to turn profitable in CY07.

Cost break-up
  4QCY05 4QCY06 CY05 CY06
Raw material consumption 23.5% 35.8% 25.9% 25.9%
Purchase of finished goods 13.1% 4.4% 15.0% 12.8%
Staff cost 14.5% 15.6% 13.2% 14.6%
R&D expenditure 4.4% 2.5% 4.8% 3.5%
Other expenditure 21.3% 18.5% 17.9% 20.1%

Bottomline scenario: Wockhardt’s bottomline declined by 6% YoY during CY06. However, this has to be viewed in context of the extraordinary expense incurred this year (not present last year), which included expenses related to inorganic growth initiatives in the US market. The extraordinary item also includes expenses on account of additional charge-backs relating to US sales for previous years. If one were to exclude this extraordinary effect, the bottomline has actually grown by 17% YoY.

Quarterly trend
(%) 3QCY05 4QCY05 1QCY06* 2QCY06 3QCY06 4QCY06
Sales growth (YoY) 12.0% 5.4% 13.4% 9.4% 21.8% 43.7%
Operating profit margin 24.3% 23.3% 19.6% 21.7% 22.2% 23.2%
Net profit growth (YoY) 16.5% 15.7% - -18.3% 13.7% 19.5%
* Net loss during the quarter

What to expect?
At the current price of Rs 333, the stock is trading at a price to earnings multiple of 11.5 times our estimated CY07 earnings. In the domestic market, biopharmaceuticals and in-licensing will be the key growth drivers for Wockhardt going forward. The company’s strategy in the domestic market is to increase market reach and penetration of existing products and focus on new product launches through the in-licensing route. 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. In the US market, the company's focus on injectables will be the key, as this field has relatively lesser competition due to the complex technology involved and high level of investment required. The company is also looking to ramp up its ANDA filings in the US market going forward. On the biotech front, the company’s focus will be on insulin for which the regulatory pathway has been made clear in Europe and will look to file the product in CY08. However, pricing pressure in the US and German markets would continue to remain a cause for concern going forward. We shall soon update our research report on the company.

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