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Wockhardt: India, Europe drive growth
Apr 28, 2007

Performance summary
Wockhardt has announced strong results for the first quarter ended March 2007. Strong revenue growth from Europe and India has led to the robust growth in topline for the quarter. Operating margins improved by 260 basis points (2.6%) led by a fall in R&D and other expenditure (as percentage of sales). Against a net loss in 1QCY06 (due to an extraordinary expense), Wockhardt reported net profits in 1QCY07. Excluding this impact, bottomline growth at 17% YoY has been slower than the topline growth largely owing to higher interest costs and tax charges.

Financial performance: A snapshot
(Rs m) 1QCY06 1QCY07 Change
Net sales 3,515 5,228 48.7%
Expenditure 2,826 4,069 44.0%
Operating profit (EBDITA) 689 1,159 68.2%
Operating profit margin (%) 19.6% 22.2%  
Other income 110 22 -80.0%
Interest - 129  
Depreciation 137 181 32.1%
Profit before tax 662 871 31.6%
Extraordinary item (604) -  
Tax 95 208 118.9%
Profit after tax /(loss) (37) 663  
Net profit margin (%) -1.1% 12.7%  
No. of shares (m)   109.4  
Diluted earnings per share (Rs m)*   26.6  
P/E ratio (x)*   15.9  
* 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 1QCY07?
Indian business bolstered: Wockhardt’s domestic business registered a robust 35% YoY growth in 1QCY07. This was largely driven by the company’s focus on high-end niche therapeutic areas, strengthening its presence in existing businesses and new product launches. Revitalisation of the acquired business of Dumex India with its flagship brands ‘Farex’ and ‘Protinex’ has not only augmented the company’s nutritional portfolio but has also boosted the performance of the Indian business. Wockhardt has also been active on the product in-licensing front to keep up the pace of new product launches in the domestic market. During the quarter, the company signed 2 in-licensing agreements with Advanced Biotechnologies Inc, US and Syrio Pharma, Milan (both products being in the dermatology space).

Revenue: Geographical mix
(Rs m) 1QCY06 1QCY07 Change
India 1,353 1,830 35.3%
US 429 493 14.9%
Europe 1,296 2,499 92.8%
Rest of the world (ROW) 437 406 -7.1%
Total 3,515 5,228 48.7%

Revenue: Business mix
(Rs m) 1QCY06 1QCY07 Change
Formulations 3,092 4,553 47.3%
Bulk 423 675 59.6%
Total 3,515 5,228 48.7%
US – Ramp up in launches: Revenues from the US business grew by 15% YoY during the quarter and was largely led by the robust 44% YoY growth in formulations. The company is now marketing 18 products in the US market, out of which one-third are injectibles. During the quarter, it received ANDA approvals for 5 new products. The total market for all these products put together has been pegged at US$ 720 m and would be launched in the coming quarters.

Europe – The strongest of them all: The 93% YoY revenue growth clocked by the European region during the quarter was driven by a healthy performance across the existing geographies of the UK and Germany, new product launches and the newly acquired business of Pinewood Laboratories, an Irish company having a strong presence in Ireland and the UK. While the company has not divulged details, both the UK and Germany have recorded strong growth during the quarter, with the company having launched 3 new products in the UK market. Pinewood launched 4 new products during the quarter and has exhibited an improvement in its margins. Wockhardt is at present in the process of integrating Pinewood with itself.

Margins expand: Operating margins during the quarter improved by 260 basis points owing to the fall in R&D and other expenditure (as percentage of sales). Dumex India achieved breakeven within 6 months of its acquisition in July 2006 and has also contributed to the margin expansion during the quarter.

Cost break-up
  1QCY06 1QCY07
Raw material consumption 21.0% 26.8%
Purchase of finished goods 15.6% 12.4%
Staff cost 15.7% 15.5%
R&D expenditure 6.5% 3.1%
Other expenditure 21.6% 20.0%

Bottomline scenario: Excluding the impact of the extraordinary expense incurred in 1QCY06, Wockhardt’s bottomline for 1QCY07 has registered a 17% YoY growth. This growth is relatively much slower than the topline growth due to higher interest costs and tax charges. The extraordinary expense incurred last quarter (not present in 1QCY07) included expenses related to inorganic growth initiatives in the US market as also expenses on account of additional charge-backs relating to US sales for previous years.

Quarterly trend
(%) 4QCY05 1QCY06 2QCY06 3QCY06 4QCY06 1QCY07
Sales growth (YoY) 5.4% 13.4% 9.4% 21.8% 43.7% 48.7%
Operating profit margin 23.3% 19.6% 21.7% 22.2% 23.2% 22.2%
Net profit margin 15.7% -1.1% 15.4% 16.9% 16.5% 12.7%

What to expect?
At the current price of Rs 422, the stock is trading at a multiple of 13.8 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 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. Wockhardt will look to file the product in this market in CY08. However, pricing pressure in the US and German markets would continue to remain a cause for concern going forward. We maintain our positive view on the stock.

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