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Research meet extracts: Wockhardt - Views on News from Equitymaster
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Research meet extracts: Wockhardt
Oct 12, 2004

We recently met up with Wockhardt Limited to get a perspective on its international strategy and its growth prospects. The following is the gist of our takeaways from that meeting.

Company background
Wockhardt Ltd. is one of the leading domestic pharma companies with strong presence in the lifestyle segment and growing focus on biotechnology. Intense price competition and price regulations prevalent in the domestic markets have resulted in the company gradually shifting its focus to exports. Consequently, Wockhardt has acquired two UK-based companies Wallis Laboratories, C P Pharma and the German Esparma GmBH. These acquisitions have resulted in Wockhardt becoming one of the top ten generic drugs manufacturing companies in the UK. The company derives 57% of its revenues from the export markets. The company has proven its R&D capabilities by indigenously developing and launching Biovac-B (hepatitis - B) vaccine, Wepox (Erythropotein) and Wosulin (human insulin). The company has a very strong NCE programme focusing on anti-infectives. Out of the three leads it is working on, WCK 771 has completed Phase II clinical trials and will soon commence Phase III trials. The company spends about 7% of its sales on R&D.

European operations:
The company is currently focusing on Europe as a key growth driver. With three acquisitions in Europe (Wallis Labs and CP Pharma in UK and Esparma GmBH in Germany), Wockhardt is well set to leverage its position in UK to other European markets. The company currently has 25 products in its UK portfolio and has revenues of about US$ 80 m. The company is planning to introduce new products in the European markets and expand its existing product portfolio.

With the acquisition of Esparma GmBH, Germany, Wockhardt looks set to expand its European market beyond UK. The company's manufacturing facilities in UK and India will be used to service the German market. This will help in maintaining margins, as economies of scale will come into the UK manufacturing facilities. Another major benefit is the cross utilization of marketing authorizations and product licenses in these two markets. There are as many as 12 Esparma products in Germen generics market.

US strategy
The company has been selling its products in the US through marketing tie-ups with Ranbaxy and Ivax. However, company is now expanding its own operations. It has opened its own offices in the US and is expanding its sales and marketing team. The company has total of 15 ANDA's filed, of which 5 have been filed in 2004 till date. It is planning to file another 8-10 ANDA's this year.

In India
In the domestic market, the company is focused on several products such as Proxyvon (pain management), Wepox (EPO) and Methycobol (Diabetes). These drugs contribute about 30% to its domestic formulations revenues. Apart from that, the company is expecting revenues of Rs 150 m from the Human insulin product, Wosulin, by the end of 2004. According to the management, biologicals are going to be the major growth driver for the company going forward.

The company has invested close to Rs 2 bn in setting up production capacity for three key biological products viz. Human Insulin, Hepatitis B vaccine and Erythropoietin (EPO). Currently, the company is selling its biological products in the Indian markets. Apart from that it is selling EPO in as many as 15 other lesser-regulated markets. Wockhardt sells about Rs 200 m worth of EPO (including India).

The basic strategy of the company is to move up the value chain by creating a critical mass of generics offering in the US market and focusing on its own branded products. Apart from this, the company has created a critical mass in Europe and is planning to consolidate its position there. It is also eyeing an acquisition in Europe for which company has raised a debt of US$ 100 m in form of FCCB (foreign currency convertible bonds). On the R&D front, the company has already begun phase II clinical trails of WCK 771 (an anti-infective drug). Apart from that, the company's major focus will be on Biologicals.

Conclusion
At Rs 337 the stock is trading at 21x its projected CY04 earnings. Wockhardt, despite its early mover advantage, has not been very successful in capitalizing on it. However, increased focus in the international markets and prudent acquisitions are promising signs for growth. However, the growth rates that were visible in last three quarters will taper and the margins that company has enjoyed are likely to come down too. While setting up its own operations in the US is a positive from a long-term perspective, it will lead to higher expenditure and shrinking margins in the short term.

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