Pharmaceutical Wockhardt Ltd. (WL)breport.myiris.com/NSBL/WOCKHARD_20111130.pdf · Initiating Coverage Wockhardt Ltd. (WL) Out of the woods, at last Initiating Coverage Networth Research

1

INDIA

Institutional Research

Pharmaceutical

Initiating Coverage

Wockhardt Ltd. (WL)

Out of the woods, at last

Initiating Coverage Networth Research is also available on Bloomberg and Thomson

Date: 30 November, 2011

Analyst: Vishal Kothari [email protected]

Tel No.: 022 3022 5900

Balance‐sheet deleveraging will allow WL to focus on future growth

Management remains committed to settle all its contingent liabilities such as derivatives/ hedging contracts, evident from the significant reduction to Rs 2.4bn (in Sep’11). The CDR scheme implementation allows leg room in repaying its secured lenders (till Dec’18). Responding to the petition filed by its unsecured lenders, WL has assured the Court of honoring its repayment obligations (by Aug’12) out of the proceeds from divesture of its non‐core businesses.

Strategic acquisitions & focused R&D is paying off

Planned acquisitions & successful integrations have created an expansive scale of operations with formidable presence across regulated markets., WL will now start reaping benefits as strategic raw material sourcing, avail cross‐selling opportunities, generate operational efficiencies on rationalization of capacities. Strong R&D focus has aided development of a diversified portfolio (300 products ‐ current & developing), along with a strong, ready‐to‐launch pipeline (41 products) for regulated markets (12–15: US & 9: EU).

Strong momentum anticipated in regulated markets

FDA approval for one of its most vital facility and establishment of marketing network is set to accelerate growth in the US segment, which would emerge as the key growth driver. We expect the US segment to deliver CAGR of 18% over FY11‐13E to Rs 14.9bn. WL‐EU has outperformed the broad‐market on back of its hospitals, exports and CRAMS businesses. We expect the EU segment to deliver CAGR of 8.2% over FY11‐13E to Rs 16.6bn.

Steady growth seen in domestic segment

Domestically, the management has initiated (two‐pronged strategy) expansion into novel therapy segments along with an expanding field‐force, aimed at broadening reach and improving doctor‐relationships, leading to expansive margins & higher profitability. We expect India segment (~28% share in FY11 revenue) to deliver revenue growth of 7.1% CAGR to Rs 12.2bn over FY11‐13E.

Valuations ‐ valuation expansion likely on improving scenarios

The stock currently trades at 6x its FY13E earnings. On the back of confluence of factors like efficiently‐integrated global assets gaining momentum, niche positioning and monetization capability of its potent pipeline, we expect higher profitability going forward (viz. EPS to grow from Rs 8.3 to Rs 68.5 over FY11‐13E). With resolution of the contentious issues and robust revenue outlook over FY11‐13E (CAGR of 10.8% to Rs 46bn), we firmly believe that the stock deserve higher valuations. At CMP of Rs 413, we initiate coverage with “Buy” recommendation with a 1‐year price target of Rs 548 (8x FY13E EPS), implying an upside of 32%.

Rating BUY Target Price ` 548.30 CMP ` 413.65 Upside 32%

Sensex 16,008.34

Key Data Bloomberg Code WPL IN

Reuters Code WCKH.BO

NSE Code WOCKPHARMA

Current Share o/s (mn) 109.4

Diluted Share o/s (mn) 109.4

Mkt Cap (`bn/$mn) 45.1/860.6

52 WK H/L (`) 473/303

Daily Vol. (3M NSE Avg) 260154

Face Value (`) 5

Beta 1.07

1 USD/` 52.4

Shareholding Pattern (%) Promoters 73.6

FII 1.1

Others 25.2

Price Performance (%) 1M 6M 1yr

WOCKHARDT ‐7.0 6.7 11.8

NIFTY ‐9.2 ‐3.3 ‐17.5

Source: Bloomberg; *As on 29 Nov, 2011

Exhibit 1: Key Financials (Rs mn)

Particulars Revenue Gr% YoY EBITDA Gr% YoY APAT Gr% YoY EPS (Adj.) Gr% YoY P/EPS EV/EBITDA RONW (%) ROCE (%) CY08 35,898 7,855 (1,389) (13) (32.6) 10.3 (11.4) 14.7 FY10 45,014 25.4 8,231 4.8 (10,007) 620.6 (91) 620.6 (4.5) 10.0 (100.2) 13.9 FY11 37,512 (16.7) 9,087 10.4 905 (109.0) 8 (109.0) 50.0 8.7 9.2 16.6 FY12E 41,184 9.8 10,955 20.6 13,939 1,439.9 127 1,439.9 3.2 5.7 83.6 18.2 FY13E 46,013 11.7 12,792 16.8 7,500 (46.2) 69 (46.2) 6.0 4.5 29.0 20.1

Source: Company, Networth Research

2 Initiating Coverage

Investment Rationale:

Strengthening its debt‐laden Balance Sheet – Ironing‐out the creases:

Aggressive expansion leads to debt‐ridden balance sheet

To establish a global footprint, Wockhardt (WL) was amongst the first Indian pharmaceutical player to embark upon the path of inorganic growth, primarily in regulated markets (EU and US). Although serial strategic acquisitions enabled it to emerge as one of the biggest Indian generics pharmaceutical player in EU, but on the flip‐side such aggressive leveraged buy‐outs overstretched its balance sheet, as incumbent cash‐flows were not enough to service the debts. This ultimately impacted its redemption power of FCCBs.

WL’s debt overhang became a serious cause of concern when it failed to repay the (Rs 4,558mn) FCCBs that matured in Oct 2009. The situation was further aggravated by its inability to divest some of its non‐core business due to strong opposition from creditors.

Exhibit 2: Net Debt & Gross Block

0

5

10

15

20

25

30

35

40

45

CY05 CY06 CY07 CY08 FY10 FY11 FY12E FY13E

Gross Block (Rs bn) Net Debt (Rs bn)


Corporate Debt Restructuring

Realizing its inability to honor its credit obligations, especially the FCCBs, WL approached the CDR Cell through ICICI Bank and availed approval for its scheme on July 4, 2009. The scheme (effective from April 15, 2009) covered most outstanding liabilities except certain FCCBs and disputed derivative contract liabilities.

As per the approved scheme, WL allotted approx. 153mn preference shares to the CDR lenders valued cumulatively at Rs 666.4mn. These Non‐convertible (NCCRPS) and Optionally‐convertible (OCCRPS) Cumulative, Redeemable Preference Shares would be convertible in 2015 and redeemable in 2018.

Exhibit 3: D/E ratio & Interest Coverage Ratio

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

CY07 CY08 FY10 FY11 FY12E FY13E

Int. Coverage Ratio D/E Ratio



In the wake of significant revenue reduction on account of patent expiry of its key product (ART50) (got into its portfolio thru acquisition of Negma Labs, France), Wockhardt (France) has been put under safeguard proceedings, which involves loan restructuring (€ 88mn) and reduction in operating expenses. It sees no further asset‐value impairment, as it expects several potent products to be launched, as soon as CY12.

The USD 250mn loan of Wockhardt EU Operations (Swiss) has been put into rescheduling mode wherein more than 2/3rd majority lenders (aggregating to 69% of the total value) have agreed to re‐cast debts and signed the new terms and conditions. It anticipates the negotiations with other lenders to culminate similarly, enabling successful reschedulement of the entire loan amount.

Debt & off‐the‐balance‐sheet issues getting resolved at fast pace

The approval of Wockhardt’s proposed debt restructuring by the CDR Cell had elicited contrasting responses from its secured lenders and unsecured creditors.

The Unsecured Creditors (majorly FCCB holders): Initially, the promoters did manage to reach a settlement with a few minor bond‐holders, wherein they had agreed to accept new FCCBs (maturity ‐ 2018) in lieu of the erstwhile defaulted bonds (maturity ‐ 2009). Rejecting this proposal, the major creditors (Sun Pharma & QVT hold ~42% of the o/s FCCBs ‐ as per media sources) explicitly expressed discontent at the CDR scheme implementation, and adopted legal recourse to recover their dues. These creditors cumulatively filed a winding‐up petition against WL in court, demanding appointment of an official liquidator to execute asset divestments till the extent of recovery of their dues.

In response, WL assured the Court and its bond‐holders that it would honor its loan repayment obligations, seeking permission to divest its nutrition business to the French company DANONE. It further assured that sale proceeds from this divestment would be primarily utilized towards repaying its FCCB holders.

WL has signed an undertaking in the court, with an explicit time‐table to repay its creditors. In case of failure to adhere, the court would appoint an official liquidator to divest WL’s assets to recover dues of the aggrieved (bond holders) lenders. The management’s resolve to turnaround the company is clearly indicated by the fact that it has immediately complied with the court and deposited Rs 1.15bn, as per the mandated schedule.

Major unsecured lenders (FCCB holders) are BNY Corporate Trustees Services Ltd, Barclays Capital Services Ltd, US Hedge fund QVT Fund LP, Quintessence Fund LP, Bank of Nova Scotia and Sun Pharma Global Inc.

Exhibit 4: Mandate for FCCB repayment

No Date Amount (Rs bn) 1 FY11 1.15 2 Dec'11 0.85 3 January'12 0.30 4 March'12 1.00 5 June'12 0.50 6 August'11 0.80

Pending 3.45 Total 4.60

Source: Company, Networth Research, Final Judgment copy of Bombay High Court


The Secured lenders of Wockhardt: During this litigation, when the promoters sought permission from the Court for divestiture of its Nutrition business to DANONE, the secured lenders contended that since most assets of Wockhardt are charged to them, bondholders, who have unsecured exposure to the company, have no right over the proceeds from sale of assets by WL.

This was surprising, as the secured lenders had supported Wockhardt all along, even aiding it throughout the application and implementation of the CDR scheme. This sudden change of stance by the secured lenders was completely dismissed by Court, who mandated that the unsecured lenders would be primarily remitted from the divestment proceeds. Court has permitted the secured lenders to adopt a legal route towards recovering their dues, a move not yet implemented by them.

Major secured lenders are ICICI Bank, SBI, IDBI, IOB, BOI, PNB, HDFC Bank, & ING Vysya.

Exhibit 5: Debt–repayment schedule: Sale of Nutrition business to DANONE at €250mn is the savior

Long‐Term Debt Schedule FY11 FY12E FY13E FY14E Secured Opening Balance 33,792 33,142 29,991 Debt Repaid (650) (3,150) (1,150)

Repayment of WCL from Banks (650) (650) (650) Repayment of Debentures (500) (500) Repayment of TL (2,000)

Closing Balance 33,792 33,142 29,992 28,841

Unsecured Opening Balance 4,703 58 58 Debt Repaid (4,645) 0 0 Closing Balance 4,703 58 58 58 Total Debt outstanding at the year end 38,495 33,200 30,050 28,899


Divestment proceeds would help de‐lever its Balance Sheet

Since last couple of years, WL has undertaken several measures towards restructuring, rationalization and optimization of its business assets strictly in accordance with the approval of Court, its creditors and investors. Some prominent steps have been:

Divestments of its non‐core businesses / assets

Implementation of the CDR scheme

Several benefits are expected to accrue to WL:

Deleveraged Balance Sheet, post‐repayment of unsecured lenders (especially the Bond holders) and secured creditors.

Sole focus upon ‘human pharmaceutical’ segment


Exhibit 6: Divestments

CY Acquiring Co. Country Div. Price Summary/Justification

2009 Lindopharm GmbH Germany Rs 1.2bn Divested its German business Esparma GmbH to Mova GmbH, a Lindopharm GmbH group co.

2009 Vetoquinol SA India Rs 1.7bn Divested its Animal healthcare division to the French Veterinary care co.

2011 DANONE India € 250mn Divestment of nutrition business ‐ (Mother & Child Care & Nutriuno businesses) including brands Farex®, Dexolac®, Nusobee® and Protinex®

Off‐the‐balance‐sheet settlement

Management remains committed to settle all its contingent liabilities related to derivatives / hedging contracts, evident from the significant reduction in recent times. With all other contracts completely settled, the management is currently under negotiations with Deutsche Bank to settle the final set of outstanding contracts (face value approx. Rs 2.4bn).

Date Outstanding Derivative / Hedging contracts (Rs mn) Mar’10 9,607Mar’11 3,725Sep’11 2,400

The most recent settlement made out was with RBS, which closed at Rs 330mn for outstanding contracts worth Rs 1.33bn (face value), signifying a discount of approx. 75%. This gives us an indication of the erstwhile and future settlements enclosed by the management. We believe that the management is committed to settle all its contingent liabilities at the earliest, and we believe the issue of settlement of these liabilities to easily sail through on the back of significant cash proceeds out of the said nutritional business.

Strategic acquisitions and focus upon research aid niche positioning:

Acquisitions – synchrony coming into play

Early‐mover in establishing global network:

One of early Indian companies to foray into regulated markets with an objective to capitalize upon opportunities such as relatively lower generic penetration and leverage upon its operational efficiencies.

In the current scenario, when patents worth approx. USD 100bn are about to expire (2010‐15) across developed markets, WL stands well‐poised to cash‐in on the early‐mover advantage in establishing a global footprint.

Several acquisitions across regulated markets (EU & US) have given WL formidable presence in these markets. Thus we believe that going forward the major revenue contribution would continue to come from the overseas markets.

Successful integration of acquired assets to push up revenue growth:

With operational rationalization and restructuring of the acquired overseas assets behind us, we foresee acceleration of revenue from the overseas front.

Strong focus upon R&D:

Focused R&D has led to development of complex products, and sustained effort on brand‐positioning enabled it gain formidable presence in its target markets.


Exhibit 7: Acquisitions

CY Target Co. Country Acquisition Price Summary/Justification

1998 Wallis Labs UK US$ 9mn Entry in the regulated UK market; Acquired loss‐making (Manufacturer and distributor of OTC drugs) company & turned it around.

1998 Merind India Rs 936mn Expansion of therapeutic coverage; Consolidating domestic position

2003 CP Pharma Holdings UK £ 10.85 mn CP Pharma has 4 key business verticals ‐ hospital drugs, generics, CRAMS & exports. It has 225 product licences, providing strong revenue growth potential

2004 Esparma GmbH Germany US$ 11mn Entry in the regulated German market; consolidating its presence in EU

2006 Dumex India India ‐ Acquired Dumex India Pvt.; Acquired Protinex & Farex brands from Royal Numico NV (Netherlands)

2006 Pinewood Labs Ireland US$150mn Acquired Entry & leadership position in the genericising market of Ireland; Consolidating in UK: As exports to UK constitute >50% revenue of Pinewood Strategic fit: Pinewood (liquids & creams) complements Wockhardt UK's (injectable and solid dosages) portfolio

2007 Negma Labs France US$ 265mn Best entry into the French generics market; Acquired R&D based pharmaceutical co. with 172 patents, allows WL to extend the patented portfolio to other EU mkts

2007 Morton Grove Pharma

USA $38mn Right entry vehicle into US, with portfolio of 31 products, including 2 branded generic & healthy pipeline of new products with 16 formulations under development and 6 ANDAs under review.

Acquisition ‐ Costs and Benefits:

Spent approx. Rs 25bn towards the spate of acquisitions (Leveraged buy‐outs mostly in EU), majority of which were spent towards acquisition of Pinewood Labs, Ireland (2006) and Negma Labs, France (2007).

Though these acquisitions took heavy toll on its balance sheet, the silver lining is that henceforth WL will start reaping benefits via cost savings by strategic raw material sourcing, providing cross‐selling opportunities, generating higher operational efficiencies (lower manufacturing and R&D expenses) on rationalization of capacities.

WL has achieved expansive scale of operations and gained formidable presence across lucrative

markets. We firmly believe WL is coming out of its stressful period and entering an era pronounced by

exciting growth.

Core focus upon R&D and manufacturing deems strong, niche positioning

Dedicated focus and significant investments in R&D has enabled WL to develop strong product portfolio and pipeline across various therapeutic segments for different markets.

Developed a diversified product portfolio with 300 products in different developmental stages including those already in the market.

Strong product‐pipeline with 41 products, to be launched across developed markets within the next 18 months [including 12‐15 products in US and 9 products in EU].

Recently, WL has completed 20 filings having a cumulative local market value (LMV) of more than USD 20bn, which are to be launched in 2011‐12, and an equally strong pipeline for the future.


Exhibit 8: Products in various therapy segments

0

10

20

30

40

50

60

CNS

Anti‐infectives

Respiratory & …

CVS & Circulatory

Metabolic / …

Digestive

Autoimmune & …

Derm

atology

Cancer

Miscellaneous

Blood & Lym

phatic

Musculo‐skeletal

Kidney & Genito‐…

Substance

abuse

Ophthalmology &

…

Women's health

Dental


Strong growth momentum on product launches: During Q1FY12, it received four approvals from USFDA (25 products still await FDA approval) and launched three products, which contributed Rs31mn to the overall topline.

Product Form Launch DateDonepezil Tabs May’11

Venlafaxine XR Capsules June’11Levofloxacin Capsules June’11

Exhibit 9: Patents and Products Fillings and Approvals

FY11 Product Filings Product Approvals Patent Filings Patent Approvals

US 10 9 To Date 1369 110

EU 6 6 FY11 148 38

NDDR programme: Seeing sparse competition in drug development within anti‐infectives, WL laid strong focus enabling development of diversified portfolio and promising pipeline of upcoming products. The NDDR program is in advanced stages of development, having received US IND approval for 2 of its products.

Exhibit 10: Research (The NDDR* pipeline for anti‐infectives)

Product Name

Infections Phase Form Description

WCK771 Staphylococcal infections like methicillin resistant infections 2 Intravenous Broad‐spectrum tricyclic fluoroquinolone antibiotic.

WCK2349 Staphylococcal infections like methicillin resistant infections 1 Oral Investigational broad‐spectrum prodrug of parenteral WCK 771

WCK1152 Respiratory Tract infections including hospital acquired infections

1 Oral & Intravenous Anti‐pneumococcal antibacterial agent

WCK1734 Skin infections Pre‐

clinical Topical (Dermatological)

DNA gyrase‐inhibitor necessary for proper bacterial DNA formation and replication.

In US, Phase I clinical trials for WCK 771 and WCK 4873 will soon commence

In India and US, Phase II clinical trials for WCK2349 have been completed successfully


Strategic positioning across markets

I. US Market – Strong Product portfolio to sustain strong growth momentum

New product launches

New product launches include launch of niche products such as Metoprolol (CVS) and Divalproex (CNS). This is the result of WL’s diligent focus and strategy to develop technologically complex products.

Market‐share gains in existing products boosted by management strategy focused upon increasing prescription sales. Metoprolol ER captured 10.7% market share in its first year of launch and the successful Day‐1 launch of Tamsulosin (indicated for Benign Prostate Hyperplasia‐BPH) captured a 7% market share (IMS Mar’11)

In FY11, the company has made 10 filings with the USFDA and received 7 approvals. It plans to launch 12‐15 products during FY12.

Morton Grove Pharmaceuticals (MGP):

Post‐acquisition restructuring at MGP substantially augmented its operational performance.

It launched Nicardipine injection, which gained significant foothold in the US injectable market. Being the first‐to‐launch, WL gained 28% market‐share within the first year.

Pediatric division and branded generics:

The Pediatric division (est. 2009) continued to deliver higher growth momentum from sale of branded generics (Cold & Cough segment) in US.

It launched Bromfed DM (2009), which captured 10% market‐share of the segment, being the only FDA‐approved Non‐Narcotic Cough Cold (NNCC) prescription product in US.

Exhibit 11: US Sales growth over FY07 – 13E

2.7

6.5

9.1

10.7

13.0

14.9

0

2

4

6

8

10

12

14

16


Rs bn


Recent establishment of front‐ending infrastructure:

In the past, WL used to enter into front‐ending alliances, for example, in 2002, it had allied with Ranbaxy (supply agreement) for two products.

Recently, it has commenced establishing its own marketing & distribution network across US. This aids maximization of benefits from an enriched product‐portfolio (both inherent and in‐licensed), which explains the increasing revenue contribution from the US segment.

The US business has exhibited CAGR of 58.1% over FY07‐11 to Rs 10.7bn, on the back of launch of niche products and higher market‐shares of the existing product‐portfolio.


US move on genericization: a big booster

Moreover, the concurrent macro‐economic condition augurs well for Wockhardt wherein the government has introduced healthcare reforms that encourages generics usage to reduce federal healthcare budget.

Cost‐rationalization, restructuring and the US manufacturing facility (MGP) gaining full FDA approval, boosted by robust branded‐generic sales (newly‐launched pediatric division) will prove to be major growth drivers going ahead. Improved company fundamentals boosted by the macro‐economic factors, we believe that the US segment would emerge as the future growth driver, delivering CAGR of 18% over FY11‐13E to Rs 14.9bn.

II. EU – In consolidation mode

United Kingdom:

Strong performance fuelled by robust growth in hospital business, exports and CRAMS

After 8 successful launches in FY11, WL plans to launch 9 products in FY12

Strong (55% YoY) growth in exports aids it to consolidate its position in UK. (4th largest generic pharmaceutical player and 2nd largest generics supplier to UK hospitals)

Potent product portfolio constituted by drugs targeting therapy segments such as diabetes, cancer, infectives, analgesic (pain), and blood coagulation

In addition to successfully bagging a lucrative Department of Health (DoH) tender, WL remains sole supplier of animal insulin to the UK’s DoH. Going forward, we expect to see higher profitability within this product segment

WL‐UK’s (CP Pharma) USFDA approved sterile manufacturing facility is used to produce under‐contract, patented products for global pharmaceutical MNCs

Ireland:

Pinewood has delivered robust performance (5.9% growth YoY) at a time when industry has shown negative (‐2%) growth, in wake of an economic slowdown and government‐mandated price‐cuts. Strong exports and buoyant domestic performance would remain key growth drivers.

Nexazole sales crossed € 3mn, making it the most successful generic launch ever in Ireland.

For FY12, it plans 19 product launches (Domestic and Exports).

Higher hospital sales (33% growth YoY) doubled profitability, and this has helped WL to maintain its position as the top generic company (31% share of the generics market) and overall the 11th largest pharmaceutical company in Ireland.

France:

Negma recently lost patent‐cover of its key product ART50, manifesting as subdued performance. As a result, the company has been under the safe‐guard process, and the management believes that remedial measures (loan restructuring and cost‐cuts) along with novel product launches would re‐establish the company’s past glory.

Nebilox has delivered stable growth, in spite of the harsh circumstances in EU.

Even in the current financial conditions and the consequ‐ential austerity measures seen across EU, WL has conso‐lidated its market presence with improved profitability. Revenue robustly grew @ 24.6% CAGR over FY07‐10, saw blip in FY11 (‐18.8%YoY) on restructuring exercise. We are hopeful of WL regaining its past growth traction in future.


Exhibit 12: EU Sales growth over FY07‐13E

14.1

18.3

21.9

14.2 15.3

16.6

0

5

10

15

20

25


Rs bn


Current grim macro‐economic condition in EU would prove to be a blessing in disguise

The economic conditions are compelling for the EU governments to adopt austerity measures and curtail healthcare expenses (encouraging generic products over branded/patented). Low generic penetration and strategically‐achieved operational efficiencies to act as fundamental growth driver growth ahead. We expect market‐share consolidation and sustained growth in the near‐term. However, once we see macro‐economic stability returning to EU, WL will increase monetization of its portfolio across the expansive network, boosting growth momentum. Successful turnaround and integration of key acquisitions, aided by strategic transfer to its Indian operations will enable the EU‐segment to bolster overall growth. We expect the EU segment to deliver CAGR of 9.5% over FY11‐13E to Rs 17.04bn.


III. India ‐ Set to augment thrust

Two‐pronged growth strategy to maximize product reach and improve doctor relations. This will ensure stronger domestic growth by tapping newer geographies, while consolidating the current markets.

Entering high‐margin chronic therapy segment by launching its CVS division. Newly‐launched Spectra division will allow it to tap extra‐urban markets. Expansion of its domestic workforce (>20% in FY11).

Diversified product portfolio focusing upon gynecology, pediatrics, orthopedics, dental and dermatology.

In FY11, 43 products were launched; 6 products appear amongst the top‐300 Indian pharmaceuticals.

In 2010, Indian pharma market grew 15%, even as WL’s market‐share increased from 1.91% to 2.05%. We strongly believe that increasing thrust on sales with focus on lucrative segments would aid stronger margins and higher profitability; we believe the domestic segment would deliver revenue growth (CAGR of 7.1%) to Rs 12.2bn over FY11‐13E.

Exhibit 13: India Sales growth over FY07 – 13e

7.8

9.7

11.4

10.4 10.6

11.9

0

2

4

6

8

10

12

14


Rs bn


Biotech – Wockhardt’s forte

Depleting NCE pipelines along with reducing R&D productivity, the global pharmaceutical industry now has been forced to look towards Biotechnology for novel therapeutic products. Biosimilars are deemed to be the future of treatment of diseases (current market size of USD 50bn).

Significant investments and early focus on Biotechnology, has gifted WL enviable expertise and mileage. Well ahead of its peers, WL has emerged as one of the prime beneficiaries of future opportunities to be thrown by this sector.

Successfully launched Glaritus (recombinant, long‐acting insulin analogue “glargine”) Soon‐to‐be‐launched: a recombinant fast acting insulin analogue “lispro” The Biotech product‐pipeline encompasses the development of “Bio‐similars”, including animal

component‐free and vegetarian‐origin products, currently in different clinical trial stages in developed regions.

WL’s domestic business has delivered CAGR of 10% over FY07‐11. Resolving issues with its creditors and investors will allow the management to chart its future growth path. The stage is set to deliver buoyant growth with robust operational performance going ahead.


Exhibit 14: In‐Licensed drugs

Date Product Deal Therapeutic Segment Party to the deal Area of Interest

Jan’09 Bonistein License, Marketing Women's Health DSM Nutritional Products Osteoporosis

Sep’08 Aloclair, Atopiclair, Acquisition, Dental, Dermatology, Sinclair Pharma plc Atopic Dermatitis,

Decapinol, Papulex Marketing Digestive System Acne, Gingivitis,

Periodontitis, Pain

Oct’07 Zindaclin License, Marketing Dermatology Crawford Healthcare Acne

Oct’07 Sammy License, Marketing Musculo‐Skeletal Gnosis SpA Osteoarthritis

Apr’07 Dermatology product License, Marketing Dermatology SYRIO PHARMA Anti‐ageing

Apr’07 Kelo‐cote License, Marketing Dermatology Advanced Biotechnologies Scars

Jan’07 Vitix License Dermatology Crawford Healthcare Vitiligo

Jun’06 Vitix License Dermatology LSI, a UK‐based company Skin Disorders

Mar’02 Enalapril Maleate Development, Cardiovascular and Ranbaxy Laboratories Congestive Heart

WOCKHARDT, Marketing, Sales Circulatory System, Limited Failure, Ulcer

Ranopine Digestive System

Feb’02 IB‐Stat Development, Digestive System Inkine Pharmaceutical Irritable Bowel

Manufacturing, Syndrome, Motility

Marketing Inhibition

Dec’00 Ascrose Co‐Market Metabolic/Endocrinology Bayer AG Diabetes

CRAMS – Promising future

Global CRAMS market was USD 19bn in 2009, and projected to be USD 31bn by 2010‐end. There are many strategic fits for WL to be in CRAMS space.

Entry into CRAMS provides manifold advantages to WL:

Optimum utilization of manufacturing capabilities

US FDA and/ or UK MHRA approved facilities provide further confidence

Wider service offerings to partner with global big pharma

Wockhardt UK has started undertaking significant work (CRAMS), majorly focusing upon sterile manufacturing (the fastest growing product segment in pharma CRAMS). Currently, estimated at approx. USD 3bn (2010‐end) and estimated to grow rapidly (syringes, vials and cartridges), especially in the Asia‐pacific region.

Past supply agreements with Amilyn, US for two diabetes injectable drugs viz. Byetta and Symlin

In‐licensing – Leveraging its infrastructure towards building strong brands

In‐licensing agreements for a total of 19 products (11 till 2008; 4 in 2009 & 4 in 2010) focusing upon sectors like dermatology, osteoarthritis, derma‐cosmetology and orthopedics.

WL has entered into in‐licensing agreements with several global pharmaceutical MNCs:

Leverage its global network (direct presence and/or through alliances) Develop popular brands from in‐licensed products, in order to develop a strong portfolio


Management’s resolve integral to operational turnaround:

Post CDR‐implementation and recent court‐settlement with its creditors, WL has delivered strong performance since last six quarters, after witnessing eight consecutive quarters of loss.

Implementation of cost‐management programmes to curtail expenses (power consumption and raw material cost) has led to consistent improvement in the operational efficiency viz. continuously reduction in COGS with steady uptick in margins.

Exhibit 15: Improving operational performance of back of better managed COGS

Particulars Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12Sales 9,216 9,401 9,508 9,387 10,532 11,105COGS 4,077 3,903 3,764 3,418 3,751 4,332COGS as % of sales 44.2 41.5 39.6 36.4 35.6 39.0Gross Profit 5,139 5,498 5,744 5,969 6,781 6,773GPM% 55.8 58.5 60.4 63.6 64.4 61.0EBITDA 1,802 2,198 2,437 2,650 3,108 3,234EBITDAM% 19.6 23.4 25.6 28.2 29.5 29.1

Management focus on improving working capital management has resulted in lower WC requirement viz. increasing inventory turnover with quicker conversion of receivables.

Exhibit 16: Improving Cash‐conversion cycle

FY07 FY08 FY10 FY11 Debtors 98 87 47 59 Inventory 113 84 62 69 Creditors 145 137 82 110 Cash‐conversion cycle 66 34 27 19

Amidst the global economic turmoil of 2009, WL has seen immense FCCB redemption pressures and huge derivative/hedging losses. Weathering such conditions successfully only highlights management’s governance capabilities and resolve to take the company to greater heights. With significant opportunities coming up for grabs in the sector globally, WL remains poised to capitalize upon the same in order to consolidate its global footprint.

Risks & Concerns

Failure to comply with court’s debt‐repayment layout Though, the current cash‐flows are healthy enough to care of repayment schedule as directed by the Court, but highly leveraged balance sheet may weigh on the valuation in the interim.

Divestiture process not falling through as planned This would preclude the inflow of sale proceeds, and thus compel the management to repay the creditors (the FCCB holders) from internal accruals, causing severe depletion of cash‐on‐books.

Delay / Irregularity in repayment to secured lenders This would instigate the secured lenders to adopt legal recourse. Ghosts of the past would haunt the present too, and the recent turnaround in its operational performance would be easily masked by the pursuant legal entanglements.

Other risks could be:

Competition,

Litigations,

Regulatory changes and issues, and delay in regulatory approvals

Delay / cancellation of product launches and pipeline product developments


Financial Highlights:

Sustainable revenue growth coming from the expansive network

The successful integration of its strategically acquired assets has today resulted in a strong global network.

Dedicated focus upon R&D, tactful in‐licensing and efficient manufacturing capabilities have resulted in an enriched product pipeline and diversified portfolio.

Cumulatively, these factors have maximized the monetization potential across the globe, which ensures buoyant revenue growth (11.3% CAGR over FY11‐13E to Rs 46.5bn) along with strong margins and robust cash flows.

Exhibit 17: Net Sales (LHS), EBITDA and APAT (RHS)

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35

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45

50


Net Sales (INR bn) EBITDA (INR bn) APAT (INR bn)


Operational efficiencies and working capital management has changed the game

WL has delivered consistently improving operating performance, even as global economic situation worsens by the day. This has majorly manifested on account of cost‐optimization strategies (lower power consumption and raw material expenses) and efficient working capital management (quicker inventory turnover and shorter debtor recovery cycle). These can be attributed for impressive numbers posted over the last six quarters, after eight consecutive loss‐making quarters. On account of rising volumes and improving operating margins (over the last several quarters) we believe operating margins to increase from 24% to 28% over FY11‐3E.

Exhibit 18: EBITDAM and RoCE%

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30


EBITDA Margin (%) ROCE (%)



Deleveraging of Balance Sheet would allow WL to focus upon future growth

Clear resolve to settle its contingent liabilities (derivatives / hedging contracts) with several financial institutions and honor its repayment commitments to the creditors (especially the FCCB holders), WL aims to clear the debt over‐hang off its books and chart a path for its future growth.

We anticipate several benefits accruing to Wockhardt from the upcoming trends and opportunities in the global pharmaceutical industry. Going forward, we would further revise our recommendations, as and when such materialistic advantages can be definitely quantified.

Exhibit 19: PATM and RoNW%

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PAT Margin (%) RONW (%)



Valuations

The stock currently trades at 6x its FY13E earnings. On the back of confluence of factors like efficiently‐integrated global assets gaining momentum, niche positioning and monetization capability of its potent pipeline, we expect higher profitability going forward (viz. EPS to grow from Rs 8.3 to Rs 68.5 over FY11‐13E).

With resolution of the contentious issues and robust revenue outlook over FY11‐13E (CAGR of 10.8% to Rs 46bn), we firmly believe that the stock deserve higher valuations. At CMP of Rs 413, we initiate coverage with “Buy” recommendation with a 1‐year price target of Rs 548 (8x FY13E EPS), implying an upside of 32%.

Exhibit 20: Relative Valuations

FY11 (INR mn) As of 30 November 2011

Company Sales EBITDA APAT M-Cap (INR mn) CMP (INR) P/E P/S EV/EBITDA

DRL 73,616 16,132 9,989 267,852 1,590.1 17.2 2.6 12.5

Ranbaxy 88,821 27,148 15,152 184,625 452.4 12.4 1.8 8.5

Cipla 61,303 14,397 9,671 262,595 326.9 19.5 3.2 14.4

Lupin 57,068 12,000 8,794 210,253 467.2 17.5 2.6 13.2

Cadila 44,647 10,393 7,361 145,167 715.1 15.5 2.4 12.0

Aurobindo 43,311 10,243 5,631 26,157 89.6 5.2 0.5 6.0

Unichem 8,201 1,584 950 9,482 106.1 8.1 0.9 4.9

Industry Averages 53852 13128 8221 158,019 13.6 2.0 10.2

Current WL Multiples 6.0 1.0 6.2

Recommended Multiples 8.0 1.3 3.1

Fair Value 548.3 546.6 523.6

Average Fair Value 539.5

Wockhardt 37,512 9,246 905 45,268 413.7

EPS (FY13E) 68.5

Net Sales (INR) ps (FY13E) 420.5

No. of Shares (mn) (FY13E) 109.4


Financials:

Income Statement (`mn)

Y/E March CY08 FY10 FY11 FY12E FY13E

Particulars 12M 15M 12M 12M 12M Gross Sales 35,984 45,059 37,552 41,266 46,105 Excise (86) (45) (40) (82) (92) Net Sales 35,898 45,014 37,512 41,184 46,013 Other income 356 295 159 ‐ ‐ Total Income 36,254 45,309 37,671 41,184 46,013 Total Expenditure 28,043 36,783 28,425 30,229 33,221 Raw Material 13,604 19,725 15,162 15,856 17,485 Employee Expenses 6,320 7,353 5,497 5,930 6,534 Other Expenses 8,119 9,705 7,766 8,443 9,203 EBIDTA (Excl. Other Income) 7,855 8,231 9,087 10,955 12,792 EBIDTA (Incl. Other Income) 8,211 8,527 9,246 10,955 12,792 Interest 2,591 3,425 2,671 2,307 2,404 Exc. Fluctuation (Gain)/Loss (105) 259 (1,367) ‐ ‐ Premium on FCCBs 1,295 268 ‐ ‐ ‐ Gross Profit 4,431 4,574 7,942 8,647 10,388 Depreciation 1,130 1,481 1,166 1,549 1,397 Profit Before Tax & EO Items 3,300 3,093 6,776 7,099 8,991 Exceptional Expenses/(Income) 5,810 12,949 5,732 (8,533) ‐ Profit Before Tax (2,510) (9,856) 1,043 15,632 8,991 Tax (916) 167 86 1,641 1,439 Net Profit (1,593) (10,023) 957 13,990 7,552 Minority Interest 205 16 (52) (52) (52) Net Profit (1,389) (10,007) 905 13,939 7,500

Balance Sheet (`mn)


Source of Funds Equity Capital 547 547 547 547 547 Preference Capital ‐ 6,686 7,452 7,452 7,452 Share Premium 134 134 134 134 134 Other Reserves 10,935 986 3,131 13,939 21,439 Net Worth 11,616 8,353 11,264 22,072 29,572 Revaluation reserve ‐ ‐ ‐ ‐ ‐ Secured Loans 31,609 35,522 33,792 33,142 29,992 Unsecured Loans 10,743 4,653 4,703 58 58 Loan Funds 42,351 40,175 38,495 33,200 30,050 Deferred Tax Liability (Net) (415) (476) (748) (748) (748) Total Capital Employed 53,552 48,052 49,011 54,524 58,874 Applications of Funds Gross Block 39,896 38,343 40,487 41,296 42,329 Less: Accumulated Depreciation 9,882 10,387 11,729 13,278 14,675 Less: Impairment provision 52 2,662 2,955 1,858 1,058 Net Block 29,962 25,294 25,802 26,160 26,596 Capital Work in Progress 6,335 7,076 8,874 5,162 4,656 Investments 932 948 896 1,090 1,177 Current Assets, Loans & Advances 17 11 7 4 6 Inventories 8,298 7,654 7,137 8,180 9,455 Sundry Debtors 8,534 5,740 6,052 7,052 8,194 Cash and Bank Balance 6,499 3,470 4,829 15,549 17,504 Loans and Advances 6,306 4,854 2,713 1,758 2,587 Other Current Assets ‐ ‐ ‐ ‐ ‐ sub total 29,637 21,719 20,732 32,540 37,740 Less : Current Liabilities & Provisions ‐ ‐ ‐ ‐ ‐ Current Liabilities 8,564 7,992 7,906 8,162 9,136 Provisions 6,188 629 1,220 2,267 2,159 sub total 14,752 8,621 9,126 10,429 11,295 Net Current Assets 14,885 13,098 11,605 22,111 26,445 P&L A/c ‐ 57 ‐ ‐ ‐ Forex translation reserve 1,439 1,578 1,833 ‐ ‐ Total Assets 53,552 48,052 49,011 54,524 58,874

Financial Ratios


Particulars 12M 15M 12M 12M 12M

Profitability

EBITDAM 21.9 18.3 24.2 26.6 27.8

NPM (3.9) (22.2) 2.4 33.8 16.3

Return

RoE (11.4) (100.2) 9.2 83.6 29.0

RoCE 14.7 13.9 16.6 18.2 20.1

Liquidity and Gearing

Cash Conversion cycle 33.7 26.7 18.8 27.5 29.8

Debt/Equity 3.6 4.8 3.4 1.5 1.0

Interest coverage 3.2 2.5 3.5 4.7 5.3

Per Share

FDEPS (12.7) (91.4) 8.3 127.4 68.5

BVPS 106.1 76.3 102.9 201.7 270.2

Valuation

P/EPS (32.6) (4.5) 50.0 3.2 6.0

P/BV 3.9 5.4 4.0 2.1 1.5

EV/EBITDA 10.3 10.0 8.7 5.7 4.5

Cash Flow Statement (`mn)


Particulars 12M 15M 12M 12M 12M Cash Flow from Op Activities 6,985 6,590 13,378 9,528 8,974 Cash Flow from Inv Activities (15,048) (10,704) (8,434) 8,795 (1,465) Cash Flow from Fin Activities 10,761 1,085 (3,585) (7,603) (5,554) Net Change in Cash 2,697 (3,029) 1,359 10,720 1,955 Opening Cash balance 3,802 6,499 3,470 4,829 15,549 Closing Cash balance 6,499 3,470 4,829 15,549 17,504


Annextures:

Annexture‐I

Company profile:

Wockhardt Ltd (WL) is an innovation‐driven pharmaceutical company (est. 1999), engaged in manufacturing and marketing of pharmaceutical and biotechnological products. It is also involved in new drug discovery, CRAMS, clinical trials and has an active multi‐disciplinary R&D program.

Manufacturing facilities: It has 10 manufacturing plants across India, US and UK, having gained approval from eminent regulatory bodies as US‐FDA and UK‐MHRA.

Network: Subsidiaries ‐ US, UK, France and Brazil; Majority‐owned companies ‐ South Africa and Mexico; Marketing offices ‐ Africa, Russia, Central and South‐East Asia.

Expansion plans: WL is planning to build a global manufacturing hub in Aurangabad. It has signed an MoU with MIDC to establish an SEZ in Aurangabad (Maharashtra), which will be spread across 107 hectares of land.

Annexture‐II

Key management personnel:

Dr. Habil Khorakiwala (Chairman) Dr. Habil Khorakiwala is the founder of Wockhardt (1967), creating one of India’s leading healthcare businesses, a multinational enterprise active in the fields of pharmaceuticals, biotechnology and hospitals.

Dr. Abid Hussain (Director) He was appointed vice chairman, Rajiv Gandhi Foundation, New Delhi, and was also the chancellor of Central University, Hyderabad. He was Secretary, Ministry of Heavy Industries, Commerce Secretary, GoI and Chairman, IIFT. He became a member of the Planning Commission in 1985.

Dr. Murtaza Khorakiwala (MD) He currently leads the EU business operations, manufacturing and the corporate services function. He is a Driving‐force behind WL’s Global Strategic Planning Team.

Shekhar Datta (Director) He has held directorships with Greaves Cotton and IDBI. He is a former member of the International Business Advisory Council of UNIDO. He is a former president of the CII, BCCI and Indo‐Italian CCI.

Bharat Patel (Director) He has more than 40 years’ management experience in marketing, sales, exports, manufacturing and buying functions. He served as CMD of P&G (India) for several years.

Aman Mehta (Director) He has over 35 years’ experience in various positions with the HSBC Group. He headed HSBC operations in the Middle East, America, Australia and Asia Pacific.

Dr. Huzaifa Khorakiwala (ED) Over the years, he has run various WL businesses and served in Corporate Administration. He devotes a significant amount of his time to WL’s CSR activities and currently serves as CEO of the Wockhardt Foundation.

R A Shah (Director) He is a senior partner of M/s Crawford Bayley & Co. a leading Mumbai firm of solicitors &

advocates. He sits on the boards of various MNC and Indian companies. He has rich experience in

the field of law & corporate affairs with special focus on foreign investments, JV, technology and

license agreements, IPR, M&A, industrial licensing, anti‐trust laws, company law and taxation.


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Key to NETWORTH Investment Rankings

Buy: Upside by>15, Accumulate: Upside by +5 to 15, Hold: Upside/Downside by ‐5 to +5, Reduce: Downside by 5 to 15, Sell: Downside by>15

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Documents

Pharmaceutical Wockhardt Ltd. (WL)breport.myiris.com/NSBL/WOCKHARD_20111130.pdf · Initiating Coverage Wockhardt Ltd. (WL) Out of the woods, at last Initiating Coverage Networth Research