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Wockhardt: Growing the inorganic way - Views on News from Equitymaster
 
 
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  • Jul 10, 2003

    Wockhardt: Growing the inorganic way

    Wockhardt is one of the leading domestic pharma companies with strong focus on the biotechnology sector for future growth. The company derives 62% of its revenues from the domestic market. However, off late, with increased competition and lower growth being witnessed in the domestic markets, Wockhardt has started to focus on exports. The company adopting the inorganic growth method for increasing exports had acquired Wallis Ltd in 1998.

    Continuing with this strategy, Wockhardt has acquired a 99.8% stake in the UK based privately owned company, C P Pharma (CPP) in an all cash deal of GBP (Great Britain Pound)11 m. The company has stated that the acquisition will be funded through internal accruals. CPP has a net worth of GBP 13 m. According to the company, with the current acquisition, Wockhardt will become one of the top ten generics companies in UK.

    CPP, a leading supplier to UK’s National Health Service, had recorded revenues of GBP 34 m in 2003. CPP derives 40% of its revenues from the hospital segment. The major product supplied by the company is natural insulin, in which the company commands significant market share in UK. The generics business is another major source of revenues (33% of revenues). The balance revenues are derived from contract manufacturing and alliances. The company undertakes contract manufacturing for pharma, biotechnology and drug delivery technology companies for whom it manufactures injectibles, freeze-dried products and solid dose tablet formulations. CPP also has sole manufacturing rights for one of Eli Lilly’s product, which is currently undergoing Phase 3 clinical trials. The company has 225 product licenses and 258 products with foreign market approvals.

    Financial impact
    (Rs m) Wockhardt* CP Pharma** Consolidated
    Revenues 8,091 2,568 10,659
    Exports as a % of revenues 38.0 - 53.0
    Operating profits 1,402 783 2,185
    OPM (%) 17.3 30.5 20.5
    * As per Dec 2002 annual results
    ** As per June 2003 annual results

    With the acquisition of CPP, Wockhardt’s revenues are likely to cross the Rs 10 b mark, with exports contributing 53% (from 38% in 2002). Wockhardt has stated that CPP has recorded an operating margin of 30.5% in 2003. This is higher than the operating margin of Wockhardt and hence we expect an improvement in the margins of the combined entity going forward. The acquisition will also help the company in establishing itself as a major player in the EU markets. Moreover, Wockhardt will be able to leverage on CPP’s long-standing established relationship with the UK hospitals and introduce its biotech products, as hospitals are the major consumers of biotech products. The company also plans to make its’ product approval filings in the UK through CPP.

    The stock is currently trading at Rs 390 implying a P/E multiple of 13.6x its 2002 earnings. Going forward, Wockhardt will be able to gain synergies from this acquisition (higher margins), increase its exports and thus insulate itself from the price cuts and low growth seen in the domestic markets. Thus, the acquisition is likely to have positive implications in the long-term for the company.

     

     

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