Wockhardt on road to recovery

There are enough people who do the math with data from drug-maker Wockhardt and say the company is well on its way out of the woods.

The debt-saddled company’s financial performance in the year gone by seems to have generated much optimism among industry-watchers. And the unconfirmed word doing the rounds is that Wockhardt is in talks with bankers to exit the Corporate Debt Restructuring (CDR) process it needed to go through with sooner than later.

But this “dramatic turnaround” is not without its naysayers. The last of Wockhardt’s deals to exit non-core businesses – the Rs 1,600-crore sale of its nutrition business to Danone, for instance – is still pending, they point out, among other things.

In fact, this is Wockhardt’s second attempt to sell the nutrition business, after an earlier deal to sell to Abbott fell through, since Wockhardt was “unable to resolve debt restructuring issues with some of its lenders.”

Wockhardt had hit hard times in 2008, with the global economic slowdown being the tipping point. The company was saddled with Rs 3,800 crore debt, and a slew of assets acquired in the heady pre-recession days, when companies across sectors went on a shopping spree overseas.

Faced with adverse market conditions, liquidity constraints and a huge debt burden, Wockhardt was forced to go on the mend. And it did just that in late March 2009, approaching the debt restructuring cell through ICICI Bank.

Light filters through?

Three years on, the pending Danone-nutrition deal notwithstanding, Wockhardt’s financials are looking strong, the business is generating cash and operationally the company is doing better than the CDR had envisaged, say some industry-watchers, after a recent meeting with Wockhardt’s management.

The Wockhardt management, however, did not respond to e-mails from Business Line , exploring whether the company had, indeed, turned the dark corner in its path to recovery.

In fact, that is another reason why clients are wary of Wockhardt, says the head of a financial services company — the company shares little data and there is apprehension that some uncomfortable financial detail could have been swept under the carpet.

Nevertheless, the company closed the year ended March 31 with revenues of over Rs 4,600-odd crore, reflecting a 23 per cent growth, and Rs 343 crore net profit. Its gross debt is estimated at Rs 3,500 crore.

About 75 per cent of the company’s revenues comes from international markets. And revenues from the United States, accounting for 41 per cent of total revenues, grew at 78 per cent. The United Kingdom market grew at 13 per cent and India and other emerging markets grew 17 per cent.

Wockhardt is sticking to basic operations, its business in the US is doing well; business from France (a troubled area earlier) has been trimmed and is under control, observes an optimistic industry-watcher, outlining the remedial measures taken.

A maker of generic medicines (that are chemically similar to innovative drugs), active pharmaceutical ingredients, vaccines and biotech products, for example insulin and so on, Wockhardt ranks among the top 10 in the estimated Rs 1 lakh crore pharma industry.

And in the year ahead, the company projects a sales growth at 20 per cent.

Attempting to separate “myth from reality”, another seasoned pharma-hand, points out that the momentum at Wockhardt is very different. The huge debt came as a blessing in disguise; for, once the operations when into CDR, the company was “banned” from hedging and so its export earnings came at Rs 55 to a dollar, he says, referring to recent currency fluctuations.

The FCCB (foreign currency convertible bonds) repayment timelines, as directed by the Bombay High Court, have been honoured, and the company has intentions of getting out of the CDR as soon as is feasible, says a Macquarie Research report, by Abhishek Singhal and Amit Sinha, after meeting the company management.

Wockhardt had provided Rs 160 crore in its accounts for recompense payable up to March 31. According to Wockhardt, if it continues to stay in the CDR programme by end-financial year 2013, the additional recompense estimated for one full year of additional stay is Rs 45 crore, the report said.

The company had defaulted on the repayment of its $ 110 million FCCB in October 2009.

And soon enough lenders and foreign investors took Wockhardt to court, including filing wind-up petitions against it.

But that bridge too has been crossed, say analysts. And the FCCB holders are being paid in full, including the interest and the case is now settled, they add. All disputed derivative contracts dangling over the company’s head have been settled, say analysts.

Hard times

Wockhardt’s free-fall started in 2008 and has been punctuated with several adverse developments, including its high-decibel, but ill-timed plan to raise Rs 800 crore to grow Wockhardt Hospitals.

Among the earliest to succumb to a highly volatile market, in February 2008, Wockhardt Hospitals had to withdraw its IPO due to feeble investor response. And this, despite a reduced price-band and extended last-date.

A beleaguered Wockhardt went in for debt restructuring in early 2009.

And later in August, Wockhardt Hospitals sold 10 key hospitals, including its Mumbai, Bangalore and Kolkata facilities to Fortis Healthcare, for over Rs 900 crore.

Fortis’ Singh brothers, Malvinder and Shivinder, were then flush with funds after having sold their entire stake in drug-maker Ranbaxy to Japanese company Daiichi Sankyo for $4.6 billion, in 2008.

But the bad news kept coming for Wockhardt, and after it defaulted on its FCCB payments in late 2009, it faced litigation from bond-holders and overseas investors unhappy with the “one-sided” deal dished out to them.

With the CDR process under way, Wockhardt had offered to buy back the FCCB at a discount.

And those who did not take the buyback option were offered an exchange of their bonds for preference shares, convertible partly in 2015 and 2018.

Parallely, Wockhardt began ridding itself of non-core assets, including German acquisition Esparma, for a reported Rs 80 crore and its animal health business for Rs 170 crore.

And finally it notched up a lucrative deal for its nutrition business with Danone.

Danone deadline

The stage is set for the Danone-nutrition deal going through, a transaction that analysts expect to happen in the “near-term”.

But in the past, Wockhardt Executive Chairman, Dr Habil Khorakiwala, had hoped to seal the deal by the year-ended March 2012. And now, another industry veteran predicts the deal will be closed by July-end.

It’s been about 10 months since the Danone deal was formalised, last August.

Earlier, Abbott’s deal to buy the nutrition business at over Rs 600 crore had come unstuck in close to 10 months! Abbott had then sought an all clear on the deal, signed in June 2009.

Not surprising then, that observers question what is holding up the completion of the Danone-nutrition sale, despite it being all but done.

Concerns around Wockhardt’s turnaround story are not to do just with the divestment of the nutrition business to Danone.

The dependence on the US market and key products launched there, besides ability to sustain growth in developed markets, are also being watched closely by industry-observers.

There is also concern over possible future litigation that could crop up, as a follow-through on disputes presently settled, besides other untoward events like a regulatory warning in key markets that could be a major setback, observe industry analysts.

But having walked the rocky road so far, Wockhardt’s focus will be on growth-drivers like its bio-similars business.

It has a proven track record in this segment, say analysts, with the successful market launches in the past of its Hepatitis B vaccine, Erythropoietin (for kidney-related applications), and human insulin, including the newer forms.

Wockhardt is looking to increase its research spending to six per cent of sales, from about five per cent last year.

The difference this time though, is that the high-octane race for growth seems to have been replaced by cautious optimism.

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