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Wockhardt: European benefits
Oct 26, 2007

Performance summary
  • Revenues grow by 69% YoY led by strong performance in Europe (up 190% YoY) backed by acquisitions.

  • The growth in Europe was driven by the contribution from Pinewood Laboratories, Ireland acquired in October 2006 and from Negma, France acquired in May 2007.

  • EBDITA margins expand by 2.3% owing to a considerable reduction in R&D and other expenditure (as percentage of sales).

  • PAT grows by 46% YoY due to strong performance at the operating level but is impacted by lower other income and higher interest costs.

Financial performance: A snapshot
(Rs m) 3QCY06 3QCY07 Change 9mCY06 9mCY07 Change
Net sales 4,380 7,381 68.5% 12,026 18,912 57.3%
Expenditure 3,409 5,572 63.4% 9,243 14,422 56.0%
Operating profit (EBDITA) 971 1,809 86.3% 2,783 4,490 61.3%
Operating profit margin (%) 22.2% 24.5%   23.1% 23.7%  
Other income 66 26 -60.6% 201 73 -63.7%
Interest - 268   - 482  
Depreciation 141 196 39.0% 409 549 34.2%
Profit before tax 896 1,371 53.0% 2,575 3,532 37.2%
Extraordinary item - -   (604) -  
Tax 156 288 84.6% 429 762 77.6%
Profit after tax /(loss) 740 1,083 46.4% 1,542 2,770 79.6%
Net profit margin (%) 16.9% 14.7%   12.8% 14.6%  
No. of shares (m) 109.4 109.4   109.4 109.4  
Diluted earnings per share (Rs m)         33.3  
P/E ratio (x)*         12.6  
* 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, ‘Pinewood’ in Ireland and ‘Negma’ in France 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 3QCY07?
The India story: Wockhardt’s domestic business registered a subdued 6% YoY growth in 2QCY08, while the growth was much stronger for 9mCY07 (up 17% YoY). This growth was largely driven by the company’s focus on high-end niche therapeutic areas, strengthening its presence in existing businesses and new product launches. While the nutritional portfolio registered an impressive 44% growth during the nine-month period, the oral anti-diabetic portfolio grew by 25% YoY. Wockhardt has also been active on the product in-licensing front to keep up the pace of new product launches in the domestic market and launched 3 in-licensed products in 9mCY07. During 3QCY07, a total of 9 products were launched, 7 of them in the oncology space.

Growth was slower in 2QFY08 due to the high base effect in 2QFY07, wherein the industry as a whole recorded a robust growth due to the incidence of various acute diseases. With these diseases not being present in the current quarter, the growth of the acute therapy segment was subdued and Wockhardt having a presence in the antibiotics and cough and cold segments was also impacted.

Revenue: Geographical mix
(Rs m) 3QCY06 3QCY07 Change 9mCY06 9mCY07 Change
India 2,006 2,131 6.2% 5,106 5,987 17.3%
Europe 1,491 4,330 190.4% 4,440 10,347 133.0%
US 543 568 4.6% 1,352 1,571 16.2%
Rest of the world (ROW) 340 352 3.5% 1,128 1,007 -10.7%
Total 4,380 7,381 68.5% 12,026 18,912 57.3%

US – Formulations led growth: Revenues from the US business grew by a staid 5% YoY during 3QCY07 and the 16% YoY growth in formulations largely contributed to this growth. The company received 10 new ANDA approvals in 9mCY07, out of which 2 were received during the quarter. The company’s portfolio now consists of 23 marketed products out of which 6 are injectables. The number of ANDAs pending approval stand at 35 and includes a mix of niche, sterile, NDDS, liquids and blockbuster products, with over US$ 30 bn in brand value.

Another development during the quarter was Wockhardt’s acquisition of Morton Grove in the US, a leading liquid generic and speciality dermatology company for US$ 38 m. Morton Grove had sales revenues of US$ 52 m with a portfolio of 31 products, 13 of which enjoy the top position in the market. Around one third of Morton’s revenues come from the branded ‘Lindane’ range of dermatological products. Having said that, Morton Grove has not been performing well for the last two years due to lack of management focus and new product launches and reported a loss at the EBDITA level to the tune of US$ 4 m. Wockhardt is looking to turnaround this company in the next 6 to 9 months through topline growth and cost rationalisation measures. This acquisition is expected to strengthen Wockhardt’s presence in the dermatology space in the US generics market.

Revenue: Business mix
(Rs m) 3QCY06 3QCY07 Change 9mCY06 9mCY07 Change
Formulations 3,929 6,952 76.9% 10,757 17,696 64.5%
Bulk 451 429 -4.9% 1,269 1,216 -4.2%
Total 4,380 7,381 68.5% 12,026 18,912 57.3%

Europe – Growing inorganically: Europe is at present the largest contributor to Wockhardt’s revenues (55%) and reported a splendid 190% YoY and 133% YoY growth during 3QCY07 and 9mCY07 respectively. This growth was primarily driven by a healthy performance across the existing geographies of the UK and Germany, new product launches and the newly acquired businesses of Pinewood Laboratories (Ireland) and Negma (France). That said, the management has indicated that the European businesses, excluding Negma, have grown in the region of 13% to 15%. Out of the 8 new products launched in Europe, 2 new products were launched in the UK for nicotine replacement therapy (NRT) and 3 new products were launched in Ireland.

Margins expand: Operating margins during the quarter improved by 2.3% owing to the fall in R&D and other expenditure (as percentage of sales). While Dumex India has achieved breakeven, improved margins of Pinewood has also played its part in boosting the overall margins of Wockhardt.

Cost break-up
  3QCY06 3QCY07 9mCY06 9mCY07
Raw material consumption 20.3% 26.5% 21.5% 22.9%
Purchase of finished goods 19.4% 14.6% 16.4% 16.1%
Staff cost 13.6% 15.1% 14.2% 15.8%
R&D expenditure 3.9% 1.6% 4.0% 2.2%
Other expenditure 20.8% 17.7% 20.7% 19.2%

Bottomline scenario: Strong performances at both the topline and the operating profit level led to the robust 46% YoY growth in the bottomline. Having said that, this growth is relatively slower than the operating profit growth (up 86% YoY) due to higher interest costs and lower other income.

Quarterly trend
(%) 2QCY06 3QCY06 4QCY06 1QCY07 2QCY07 3QCY07
Sales growth (YoY) 9.4% 21.8% 43.7% 48.7% 52.7% 68.5%
Operating profit margin 21.7% 22.2% 23.2% 22.2% 24.1% 24.5%
Net profit margin 15.4% 16.9% 16.5% 12.7% 16.2% 14.7%

What to expect?
At the current price of Rs 421, the stock is trading at a price to earnings multiple of 13.7 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. Besides this, the acquisition of Negma is also expected to widen Wockhardt’s product portfolio and strengthen its presence in the European region.

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 and will look to file the product in CY08. As far as Morton Grove is concerned, Wockhardt is looking to achieve breakeven in the next 6 to 9 months and is aiming for Morton to achieve margins at Wockhardt’s level in the next 24 to 36 months. Pricing pressure in the US and German markets and slower growth in the rest of the world markets would continue to remain a cause for concern going forward. Overall, we maintain our positive view on the stock.

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