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Wockhardt: Conference call excerpts
Nov 11, 2005

Wockhardt held a conference call post the declaration of its results for the third quarter and nine months ended September 2005 to discuss its quarterly performance and growth prospects for the future. Here are the key extracts.

About the company
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 9mCY05, Wockhardt derived 60% 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. 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).

New product launches: Wockhardt has launched four products in CY05 so far, which were injectable iron, ‘aceclofenac’ (Aceroc) in the pain management area and Dupac, which is a both oncology pain as well as diabetology pain product. While ‘Aceroc’ generated an average sale of Rs 2.5 m per month, another new product, ‘Prorab-D’ (rabeprazole with domperidone) clocked an average of Rs 3 m in revenues per month. The company will be launching interferon alpha 2B (anti-cancer) in the last quarter of this year. It is also planning to launch ‘Glargine’ (long acting insulin) either by CY06 or early CY07.

As far as the regulated markets are concerned, the European regulatory authorities have come out with guidelines for launching four biological molecules. Wockhardt is gearing up to launch two of them – insulin and erythropotein (EPO, a hormone produced by the kidney that promotes the formation of red blood cells by the bone marrow). However, the likely launch of these products will take around two years.

Perrigo deal: Wockhardt entered into a partnership deal with Perrigo, which is one of the largest OTC companies in the US having a 65% market share. Perrigo will be distributing two of Wockhardt’s products, ‘ranitidine’ and ‘famotidine’. Revenues from the same have already started filtering in. It must be noted that the company was selling ‘ranitidine’ through Ranbaxy and also through its own brand in the US markets. Now this product will be made available through all the three channels. This move is expected to boost revenues from the US region going forward.

R&D progress: WCK771 (for resistant infections) has just entered into Phase II clinical trials. WCK1152 (for respiratory infections) is still undergoing Phase I clinical trials and the progress is in line with the company’s expectations. Besides this, the company has three other molecules in the pre-clinical stage.

Biotech story: Wockhardt is on course to achieve its targeted Rs 1 bn in revenues in biogenerics for the next year overall. The company has received registration approvals from gulf countries and it is for the first time that any Indian biopharma company has been able to get approval from these countries. It has also won the tender in one of the South American countries for insulin against very stiff competition.

Out of the 25 approvals received in the biotech space, about 25% are EPO and the balance 75% is insulin. Also, the ratio is expected to be similar for 40 products pending approval. It must be noted that the company expects majority of the approvals to come in the insulin space because this product is well understood by most of the regulatory authorities internationally. As compared to this, EPO is a relatively complicated molecule requiring longer time for registration and approval.

The market size of insulin worldwide is about US$ 4 to 4.5 bn. Major players in the API/bulk drugs and formulations segments currently are Novo Nordisk, Eli Lilly, Aventis and Wockhardt. Biocon is a major player in the bulk segment.

ANDA status: Wockhardt has 15 ANDAs pending approval, majority of which have been filed in CY05. 40% of these filings are in the injectable space. The company expects six to eight approvals to come through in the next nine to twelve months and a total of around twenty in the next 24 months. The US business has clocked robust growth on account of a strong performance of the current product pipeline and its deal with Perrigo.

Licensing deals: Wockhardt is planning to move up the value chain, from its products being distributed by certain other partners to distributing products of other Indian companies. With this aim in mind, the company has entered into an alliance with Aurobindo Pharma, a Hyderabad-based pharma company, for distributing their molecules in the US markets.

The India advantage: Wockhardt believes that the cost advantage that India enjoys will continue to accrue despite MNC companies having a base in India. This is because of superior chemistry skills developed by Indian scientists for about two decades in the absence of the product patent law. Also, Indian scientists have become adept in developing non-infringing processes. This means that Indian players will continue to benefit from significant cost advantages.

What to expect?
At the current price of Rs 415, the stock is trading at a price to earnings multiple of 13.1 times our estimated CY07 earnings. 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 revenue growth. The international business is expected to significantly drive growth and garner a larger share of the revenue pie. As far as the US markets are concerned, the company intends to focus on building capabilities to achieve a critical mass.

We had recommended a ‘Buy’ on the stock in March 2005 at Rs 363, with a target price of Rs 510. The stock has already breached our target price and has retreated back to the current levels. We believe that the stock price has factored in medium-term growth prospects of the company and to that extent investors need to practice caution.

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