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Wockhardt: Analyst meet extracts
Mar 9, 2007

Wockhardt held an analyst meet on 23rd February 2007 to discuss the company’s full year (CY06) performance and its strategies for growth going forward. Here are the key takeaways. Acquisitions update: Investors should note that Wockhardt had acquired 2 companies in CY06. The first was a company called Dumex with its strong brands ‘Farex’ and ‘Protinex’ in the neutraceutical space largely catering to the domestic market. The second was the Ireland-based company Pinewood Laboratories, which is a branded generics company largely catering to the UK and Irish markets. Dumex was a loss making company at the time of acquisition (July 2006) and the company in 4QCY06 managed to break even. The company is looking for a 10% margin improvement for Dumex in CY07.

US market scenario: On the ANDA front, in CY06, Wockhardt filed 26 ANDAs and received approval for 8. The company launched 5 products during the year (including 3 steriles). Overall, the company has filed 45 plus ANDAs till date with 25 plus ANDAs awaiting approval. In CY07, the management has envisaged 7 approvals in 1HCY07 and a revenue growth of 50% YoY for the full year. It has planned more than 30 ANDA filings in CY07. The focus will be on NDDS, steriles and complex products where the level of competition is relatively lesser. The company is aiming to increase the revenue contribution from the US from 10% in CY06 to 15% in CY09.

European market scenario: For CY07, Wockhardt expects the European business to grow by 50% to 55%. This is on the back of the fact that Pinewood’s sales were not reflected for the whole of CY06. The company expects the margins of Pinewood to improve by 200 basis points and it (Wockhardt) plans to launch 40 plus new products in Europe in CY07.

As far as Pinewood is concerned, the company currently enjoys 25% market share and Wockhardt is aiming to create value from this acquisition by global sourcing, reducing operating costs and leveraging on its own European products to drive sales.

Domestic market scenario: For CY07, Wockhardt expects the revenues from the domestic business to grow by 20%+ YoY and Dumex to grow by 30% YoY. The strategy for this market will be to focus on in-licensing new products from innovators to keep Wockhardt’s product portfolio fresh. The company is planning to add two new focus divisions namely Dermaceuticals and Oncology and has lined up 7 new product launches in the first half of CY07. As the international business gains further scale, the company expects revenues from India to decline from 39% of sales in CY06 to 30% by CY09.

Revenue and profitability outlook: For CY07, Wockhardt has aimed at achieving US$ 500 m in revenues, including the revenues of the two acquisitions made in CY06, which we believe is achievable. The company also aims at becoming a US$ 1 bn company by CY09 (this target includes revenues of any potential acquisition). Wockhardt expects to maintain net profit margins in the range of 16% to 28% between CY06 and CY09.

Bio-generics outlook: Wockhardt’s total biotech sales in CY06 stood at US$ 12 m to US$ 13 m and the company expects this to triple over the next three years. It must be noted that these biotech products are currently being sold in the domestic market and semi-regulated international markets as the regulatory pathway in the developed markets of US and Europe are still to come in place. Having said that, the European regulatory authorities have come up with guidelines for the launch of biosimilars for 4 products (Insulin being one of them). Wockhardt’s focus first will be to launch ‘insulin’ for which the company is looking to make a filing during the later part of CY07. Generally, it takes around 12 to 18 months for biotech products to receive approval.

Capital expenditure: Wockhardt has outlined a capex of around Rs 4 bn between CY07 and CY09, which is for creating new capacities. This does not include any potential acquisitions and is purely for organic growth.

What to expect?

At the current price of Rs 377, the stock is trading at a price to earnings multiple of 12.0 times our estimated CY08 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 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. 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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