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Wockhardt: Research meet extracts

Jul 7, 2006

We recently met with the management of Wockhardt to discuss the performance of the company over the past year and the growth prospects going forward. Here are the key takeaways.

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 CY05, Wockhardt derived 63% of its revenues from non-India regions (60% in CY04). 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 5% of consolidated revenues on R&D in CY05 and has proven its R&D capabilities by indigenously developing and launching Biovac-B (Hepatitis-B vaccine), Wepox (Erythropotein) and Wosulin (human insulin).

On the domestic market: Biopharmaceuticals and in-licensing will be the key growth drivers for Wockhardt in the domestic market. 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. The company considers biotech as its competitive edge and new product launches include ‘Interferon’ by the end of CY06 and ‘Glargine’ in 1QCY07.

On the US and European markets: In the US market, the Wockhardt'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. Wockhardt currently has 13 products in the US market with 22 ANDAs pending approval. Out of these, 9 ANDAS are in the injectables space (the company recently received approval for its first injectable).

In Europe, as far as UK is concerned, Wockhardt is strong in the hospital segment. The company is planning to commission a new facility to expand its capacity for the manufacture of ‘Byetta’ (‘Exenatide’) cartridges. Eli Lilly is marketing this drug. The expansion project is expected to raise the cartridge manufacturing capacity by four times from the current capacity and is scheduled to go on stream by the end of CY06. While the company has a presence both in the UK and German markets, we expect Germany's contribution to be higher than that from the UK, as the latter has been plagued by severe pricing pressure.

On Rest of the World (ROW) markets: As far as ROW is concerned, Wockhardt intends to focus in major markets of Russia, CIS, S.E. Asia, Latin America and North Africa. In these markets, as in India, the focus will be on biotech products. As regards the product pipeline, the company has received 26 approvals with 60 plus such registrations in the pipeline.

On biotechnology: Biotechnology is expected to be the new growth driver for Wockhardt going forward. In CY05, biotech contributed 3.1% to total revenues out of which two thirds of the revenues were from the domestic market. Biotechnology is a highly niche area having higher barriers to entry as compared to other fields. These entry barriers are in terms of stringent regulations, complex technology involved and longer lead times in developing products. This is an area where Wockhardt is expected to have an edge over its domestic peers in the Indian pharma industry.

At present, Wockhardt's biopharmaceutical revenues are largely from India and Rest of the World (ROW). In the US, at present, the guidelines with respect to biogenerics are not very clear. However, in the EU, the European authorities have come up with draft guidelines with respect to 4 biologicals. Wockhardt intends to enter this market by first launching insulin and erythropotein (EPO). However, the same is not likely before late CY07 or CY08.

On acquisitions: Wockhardt has raised US$ 110 m through the FCCB route, which will largely be used to grow the business through the inorganic route (in Europe, US and Latin America). While scouting for acquisitions, the focus will be mostly on how the product portfolio of the target company will complement its own product portfolio. However, the company will not be looking to acquire any manufacturing facility.

On capex: Wockhardt’s capex for the year has been pegged at Rs 800 m, which will largely be utilised towards its R&D efforts. The company expects to maintain its R&D expenditure at 6% to 8% of revenues going forward.

What to expect?
At the current price of Rs 370, the stock is trading at a price to earnings multiple of 12.8 times our estimated CY07 earnings. Going forward, on the domestic business front, we expect that biotech and diabetology will continue to remain key growth drivers for the company. Also, continued focus on its power brands will help Wockhardt in sustaining revenue growth in the future. The international business, especially the US, is expected to drive growth and garner a larger share of the revenue pie. That said, pricing pressure in the US and the UK markets would continue to remain a cause for concern. We maintain our positive view on the stock.

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