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Mr Habil Khorakiwala, Chairman…Hopeful of launching insulin in the US and Europe as the regulation for biogenerics is expected.

Kumar Shankar Roy

An investment can be considered in Wockhardt with a two-three year perspective. A blend of organic and inorganic initiatives across geographies, a niche portfolio and potential value unlocking from R&D, support the recommendation. Wockhardt has concentrated on a strategy of building presence and scale in markets outside India, in turn, leading to a strong foothold in the European market (60 per cent of revenues).

In the US, with the recent acquisition of Morton Grove, a liquid generic and specialty dermatology company, Wockhardt has addressed the pressing need to have a more diversified portfolio. The decision to invest in growth areas such as biotechnology and new drugs, after being formulations-driven, is set to pay off soon. Lastly, in-licensing for the domestic market and selected presence in diabetology, anti-infectives, nutraceuticals (such as Farex, Protinex) and oncology ensures above-average growth (18 per cent). At the current market price of Rs 426, the stock trades at 13 times its FY-09 earnings per share, at a valuation discount to peers.

Having invested $450 million for six acquisitions, which has generated synergies in marketing, products and markets, Wockhardt plans to build on its presence in Europe. European formulation sales doubled during the September quarter, driven by 15 per cent growth across the existing markets of the UK and Germany, and consolidation of Pinewood Labs (Ireland) and Negma Labs (France).

The momentum is likely to be sustained in EU, a market less subject to generic pricing pressures, backed by rationalisation of facilities and products from acquisitions and launches. The existing portfolio, mainly targeting old patients and consisting of osteoarthritis, hypertension-related medicines, holds promise. Wockhardt is also planning to integrate and synergise the whole European business and this is expected to lift net profit margins in this region to the 20 per cent range, from 15 per cent.

The contribution of US to Wockhardt’s revenues is expected to increase from the present 9 per cent. It has a 25-product portfolio skewed towards injectables. In the next six months, it is also expected to grab a decent market share through recent launches — Amlodipine (hypertension) and Cetirizine (allergy) tablets. Wockhardt’s pipeline represents over $ 30 billion in brand value. Even after price erosion and fragmentation in share, these products could push the US business into a new growth phase. Wockhardt has particularly done well in Day-1 launches, post-patent expiry.

The newly-acquired Morton Grove has 33 products in the market. The pending product approval of a nasal spray for Morton, expected in the second half of 2008, addresses a lucrative opportunity with fairly restricted competition. Though it registered operating losses when acquired, it is expected to turn around by February-March, through cost rationalisation and topline improvements.

Wockhardt is one of the few companies that can capitalise on the biopharmaceutical/biogeneric opportunity, expected to open up in the EU shortly. Armed with over 60 registrations (mostly in semi-regulated markets), the company has 130-140 products in its pipeline.

Having already developed six biotech drugs, it can be expected to launch biogeneric versions of insulin and other hormone-related substances in the EU by July 2009.

Wockhardt has filed over 153 patents in the first nine months of CY-2007 and is working on at least six molecules that mostly cater to the resistant infections. Its lead molecule is in the Phase-II human trials while others have completed advanced pre-clinicals. Hence, the scenario bears watching as out-licensing deal(s) may be in the offing.

Crucial to Wockhardt’s success in domestic business (a quarter of revenues) is its ‘in-licensing’ strategy, which promises superior growth, as it allows entry into high growth segments for companies unable to manufacture complex drugs on their own.

Skin and cancer are Wockhardt’s focus areas. The company has so far signed pacts with 10 companies overseas for such deals. Apart from a skin camouflage gel, a leucoderma drug and acne antibiotic, the company will shortly launch an anti-wrinkle product to treat facial scars.

In oncology, seven products have been launched last year to address the Rs 850-crore market. The strategy will help Wockhardt’s domestic business to attain faster growth in the next few years, if it launches 5-6 products annually.

With over two-thirds of revenues sourced from overseas, Wockhardt is exposed to fluctuations in currencies such as the euro and dollar vis-À-vis the rupee. This might elongate the payback period for acquisitions, impact near-term earnings prospects and increase interest costs on the already-leveraged balance-sheet.

The company tends to defer R&D expenses which could lead to lumpiness in quarterly earnings.

Conversion of FCCBs into shares, if opted for by holders, will lead to 8 per cent equity dilution.

Bulk drugs, a business segment, could witness a shrinkage, which may not be quickly compensated by other businesses.

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