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Wockhardt: Promising prospects! - Views on News from Equitymaster
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Wockhardt: Promising prospects!
Jun 24, 2005

Another Indian company, apart from Ranbaxy, which has established a footprint in the global arena is Wockhardt. The company specializes in human insulins and biotechnology. The company’s focus in these fast growing areas has paid dividends. In this article, we undertake a brief analysis of the company’s past performance and gauge where it is headed into the future.

What is the company’s business?
Wockhardt Ltd, a subsidiary of Khorakiwala Holdings and Investments Pvt. Ltd (around 75% stake), 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. During CY04, Wockhardt derived 60% of its revenues from non-India regions (up from 54% in CY03). 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. It is one of the largest spenders on R&D among its domestic peers (about 8% of consolidated revenues) and has proven its R&D capabilities by indigenously developing and launching Biovac-B (Hepatitis-B vaccine), Wepox (Erythropotein) and Wosulin (human insulin).

Numbers at a glance…
(%) CY02 CY03 CY04 CAGR since CY01 ( %)
Net sales growth 10.3% 16.4% 31.5% 19.1%
Operating profit margin 17.3% 19.0% 21.8%  
Net profit margin 13.0% 15.1% 17.2%  
Net profit growth -3.1% 35.8% 49.9% 25.4%

Performance over the years
Strong revenue growth:  During the period between CY01 and CY04, Wockhardt’s revenues have clocked a robust CAGR of 19%, largely driven by its international operations.
  • International business:  International operations have been the key growth driver for the company, having registered a strong CAGR of 43% during the said period. In fact, over the years, the company has witnessed improved visibility in the global arena. Contribution of international revenues has significantly gone up from 35% in CY01 to 60% in CY04. After acquiring CP Pharma in the UK, it recently acquired esparma GmbH in Germany, thereby gaining a foothold in the two largest generics markets in Europe. The European and US markets together, which accounted for 47% of total revenues in CY03, increased their share to 50% of the total revenue pie.

  • Indian operations:  As far as the Indian markets are concerned, its contribution to revenues has come down from 65% in CY01 to 40% in CY04 as the company has ramped up its global operations. CY02 was a bad year for the company on account of stagnancy in domestic demand and differences that the company had with the Federation of Medical Representative Association of India (FMRAI), leading to incurrence of costs in terms of additional field force which the company had recruited. In CY03, dissociation from the FMRAI and deceleration in the domestic pharmaceutical industry resulted in a 3% YoY decline in revenues. In CY04, the domestic business grew 13% YoY largely on account of a robust 81% growth of its biotech portfolio. Thus, despite the hiccups witnessed in CY02 and CY03, the company regrouped itself in CY04.

Products performance:  Over the years, the company continued its focus on power brands. ‘Methycobal’ (used for treating nerve disorders), was launched in strategic alliance with Eisai of Japan and went on to become the largest brand launched in CY02 in India. ‘Spasmoproxyvon’, which is the company’s biggest brand, crossed the Rs 500 m milestone in CY03. The company also increased its focus on its diabetic portfolio resulting in the launch of ‘Wosulin’, which managed to garner a 2.4% market share in the year of launch (CY03) and has already captured 25% of new prescriptions for insulin. The sales of ‘Wosulin’ touched the Rs 100 m in CY04. In fact, the power brands contributed to 80% of the domestic pie in 2004, recording a 15% YoY growth rate.

R&D initiative:  To highlight the company’s seriousness towards bring in new innovations to grow the product portfolio, the R&D spend has clocked a CAGR of 33% since CY01. From 6% in CY01, the R&D expenditure constituted 8% of total revenues in CY04. On the ANDA front, from 2 filings in the US in CY02, the company has increased its filings to 9 in CY04. The company’s R&D focus on the diabetology folio can be gauged by the fact that it plans to introduce a new offering ‘Glargine’ in CY06.

What to expect?
At 380, the stock is trading at a price to earnings multiple of 12.6 times our projected CY06 earnings. Wockhardt reported lacklustre performance in 1QCY05 largely on account of poor domestic sales, which were affected owing to VAT and MRP based excise related concerns. This is, however, a temporary blip and once the picture on VAT becomes clear, domestic sales should start picking up. Going forward, on the domestic business front, biotech and diabetology will continue to remain the key growth drivers for the company. Also, continued focus on its power brands will help the company sustain its revenues in the coming years. On the international business front, growth prospects look promising, as management is confident of significant revenues from Europe and especially the US markets. In fact, from 8% of total revenues in CY04, we expect revenues from the US region to form 14% of the consolidated revenues in CY07.

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