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Wockhardt: Research meeting extracts
Apr 5, 2005

We met up with Wockhardt recently to get a feel of their strategy, both in the company’s global as well as its domestic business. The following are the key takeaways from the meeting. First the global business:
The management has a two-tiered strategy for its global plans.

One is in relation to the ‘Regulated markets’, i.e. US and EU. This revolves around the ‘Generic pharma world’. US, the world’s largest pharma market (in value terms), formed only 8% of consolidated revenues in CY04 and the management is confident of quadrupling revenues from this region in the next 2 years. Europe, which formed 42% of revenues in CY04, is likely to clock a CAGR of 14% over the next 3 years. Wockhardt has plans to acquire another company in one of the EU countries (may be in France) to give this business more fillip.

The company has 10 ANDA’s and 30 DMF’s pending approval with the USFDA. We asked the company their look out before filing for ANDA for a particular drug. The answer was ‘time to market’ the generic. It takes 15 to 18 months for an FDA approval. If the company starts drug developing, without infringing any patent, it takes usually 36 to 45 months to ‘time to market’.

In terms of size, the US generics market is worth US$ 25 bn, Germany is US$ 5 bn and UK is US$ 3 bn. Wockhardt’s strategy to succeed is clearly driven by cutting down costs. It now has only 1 manufacturing facility outside India (CP Pharma). The focus is to have end-to-end capability to develop a drug, with clear control on API’s to keep costs on a tight leash. Just to give a perspective, cost of goods manufactured in the UK is atleast 5 times more than in India. The management seemed aware that once a drug comes off patent in the US, more than a few generic majors will eye the pie. Therefore, MRP of the drug in the US will see a sharp erosion (sometimes over 90%). In the end, unprofitable players will opt out. Wockhardt’s game plan is to remain profitable, even in the times of extreme competition and focus on volume driven strategy, so that it is among the last men standing in each category.

The second of course, is the ‘Rest of the World (ROW)’ strategy, where it plans to grow the ‘biotech’ as well as its formulations business. Wockhardt has received registrations of its products in 9 countries and 25 more such registrations are pending. The company has formed a JV in both South Africa and Mexico recently, and has also set up a subsidiary in Brazil.

The domestic market
As per the Wockhardt management, in the past, the domestic pharma market has clocked a growth rate that is 3% to 4% more than the GDP growth. However, more here on, industry growth will largely ape the GDP growth rate (plus or minus 1%). The management sees the Indian pharma market growing at 7% to 8% over the next 3 years. Wockhardt’s growth is likely to be better or in line with that.

A perspective on the domestic market break-up

Metro and Class 1 towns form 36% to 37% of the domestic market in value terms and are growing well above the industry growth rate. The lifestyle drugs (diabetology, oncology, CNS, CVS) are growing at a fast pace in these regions.

Class 3, 4 and rural areas are witnessing a single digit growth. This division is more to do with awareness and more importantly, the ability to pay more for high cost treatments.

The top 10 players account for 30% of the domestic pie and are largely focusing on the high growth urban areas (lifestyle drugs). Apart from these, the industry is highly fragmented with smaller players catering to different regions, as per their strategy. In the Wockhardt management’s view, the industry is likely to be fragmented over the next few years (till 2009).

The company’s business
Wockhardt Ltd, a subsidiary of Khorakiwala Holdings and Investments Pvt. Ltd, is one of the leading domestic pharmaceutical companies with strong presence in the lifestyle segment and growing focus on biotechnology. However, with the recent acquisitions in the international markets, the company has demonstrated its growing global ambitions. The company derived 60% of its revenues from non-India regions (up from 54% in CY03). This pace is likely to continue going forward. The company has a subsidiary in UK, which holds 100% in CP Pharma and Wallis Laboratories. The company has acquired ‘esparma GmbH’ in Germany and set up presence in Brazil and the US. The company is one of the largest spenders on R&D among its domestic peers (about 8% of consolidated revenues).

What to expect?
At Rs 369, the stock trades at a price to earnings multiple of 10.8 times our CY07 earnings estimates. We are enthused by Wockhardt’s overall strategy, which is reflected in our growth estimates (nearly 18% revenue and over 20% profit CAGR till CY07). In March 2005, we had rated the stock a BUY with a price target of Rs 510 with a 2-3 year perspective. We maintain the view.

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