Wockhardt Company Report

IndiaResearch

HDFC Securities Limited, Trade World, C. Wing, 1st Floor, Kamala Mills Compound, Senapati Bapat Marg,Lower Parel, Mumbai 400 013 Phone: (022) 66611700 Fax: (022) 2496 5066

Head of Institutional Equities &Derivatives: Sanju [email protected] 1859

Amit [email protected] 1828 August 03, 2007

Initiating Coverage

Wockhardt Ltd.

Wockhardt : “Wock”ing the talk...

Pharmaceutical

Wockhardt Ltd.HDFC Securities

August 03, 2007 Page 2

Table of Contents

Page No.

Executive Summary .......................................................................................................................................................................... 3

SWOT Analysis ................................................................................................................................................................................. 4

Reasons for under-performance / Key Positive Catalysts .............................................................................................................. 5

Peer Comparison ............................................................................................................................................................................. 6

Valuations ......................................................................................................................................................................................... 7

About the Company .......................................................................................................................................................................... 8

Acquisition History ............................................................................................................................................................................ 9

US Business .................................................................................................................................................................................. 10

Europe Business ........................................................................................................................................................................... 12

ROW / Indian Business .................................................................................................................................................................. 14

CRAMS / Biotech / R&D .................................................................................................................................................................. 16

Concerns ........................................................................................................................................................................................ 17

Financials ....................................................................................................................................................................................... 18

Financial Statements ...................................................................................................................................................................... 19



BUY

Key Stock Data

Sector Pharmaceutical

Reuters Code WCKH.BO

BLOOMBERG Code WPL IN

No. of Shares (mn) 109.44

Market Cap (Rs bn) 40.82

Market Cap ($ mn) 1020

Avg. 6m Vol.(mn) 120816

Stock Performance (%)

52 - Week high / low Rs.450 /324

1M 3M 6M

Absolute (%) -1.93 -9.86 10.33

Relative (%) -7.98 -21.96 -0.03

Shareholding Pattern (%)

Indian Promoters 73.64

FIs & Local MFs 10.42

FIIs 5.08

Free Float 10.86

Sensex and Stock Movement

Nifty 4356

Sensex 14986

Source : Company

CMP Rs. 373

Target Rs. 570Stock Return 54.1%

Capital Appreciation 52.8%

Dividend Yield 1.3%

Executive Summary

Over the years, Wockhardt Ltd has emerged as one of the largest integrated pharmaceutical

companies in India. It was among the first to sense the opportunity in European generics

market and acquired Wallis Lab, UK way back in 1998.

It is one of the very few companies in India to have built a strong product pipeline in

biotechnology products. Today, Wockhardt has developed comprehensive capabilities in all

facets of recombinant biotechnology, including gene cloning and development of production

strains. The company is also introducing biotechnology products in the (Rest of the World)

ROW market.

Wockhardt has gained a strong presence in the European market in the last four years

through inorganic growth and has become the largest Indian company in this market. Currently,

the company derives more than 50% of its revenue from the European market. It has also

ramped up its US business by introducing a number of generic products there. Last year, its

US business grew by more than 50% and is expected to perform extremely well in the next

two years on the back of strong ANDA (Abbreviated New Drug Application) pipelines.

The company is also active in NCE (New Chemical Entity) research. Its proprietary molecule,

WCK 771 is currently in phase II. Also, the company has started capitalizing on the opportunity

offered by CRAMS (Contract Research And Manufacturing). It has signed a deal with Amylin

for contract manufacturing. Its domestic formulation business is also doing very well. The

company is focusing on strengthening its presence in diabetology, nephrology (related to

kidneys) and nutrition segments.

Outlook and Valuation

We feel the company’s aggressive acquisitions in Europe will pay off in the future through

various synergies. Also, its US business will contribute increasingly to growth. We believe, it

is very well placed to take advantage by introducing biotechnology products in regulated

markets, once the regulations are in place. The company hopes to achieve $1bn in revenues

by the end of GY09.

Based on our estimated EPS of Rs. 35.1 for CY07 and Rs. 43.9 for CY08, the stock currently

trades at a forward PE of 10.6x and 8.5x respectively. Considering its capabilities and

strong business prospects, we feel the stock is trading at a steep discount to its peers.

Hence we recommend BUY, with a price target of Rs. 570. Our price target is based on a

PE of 13x on the CY08 expected EPS of Rs. 43.9.

Particulars (Rs mn) CY04 CY05 CY06 CY07(E) CY08(E)

Net Sales 12,516.00 14,130.00 17,290.00 25,906.58 32,982.69

% Ch. YoY 12.90 22.36 49.84 27.31

Net Profit 2,135.00 2,571.00 2,413.00 3,839.82 5,259.86

% Ch. YoY 20.42 (6.15) 59.13 36.98

EPS 19.59 23.52 22.05 35.09 43.90

% Ch. YoY 20.09 (6.26) 59.13 25.13

PER(x) 15.18 18.85 19.96 10.63 8.50

EV/EBIDTA(x) 12.08 15.34 14.52 8.78 6.37

Book Value (Rs.) 56.57 74.67 97.43 127.52 195.46

P/BV(x) 5.26 5.94 4.52 2.92 1.91

ROCE(%) 31.75 18.14 12.08 15.97 19.02

ROE(%) 69.25 35.89 25.64 31.19 28.15

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Weaknesses

• Nascent presence in the US market (Less than 10% contribution to total revenues)

• Highly leveraged balance sheet with D/E ratio more than 1.5x

Threats

• Non-conversion of FCCBs will lead to huge liabilities in FY09 of $140mn. Also, FCCB

conversion will lead to about 9% equity dilution from Rs 547mn to Rs 559mn.

• Integration of European businesses is a major challenge (Negma and Pinewood

acquisitions have to be integrated with the UK business)

• Pricing pressure in the US may restrict expected revenue growth (price erosion more

than 95%) specially in cephalosporin segment, with growing competition from

companies like Orchid Chemicals and Lupin

• Any expensive acquisitions may increase payback period

• Increasing competition in the European generic market with the growing presence of

frontline Indian pharma companies including Ranbaxy and Reddys

• There is a risk of domestic currency appreciation as the company derives major

revenue from international operations (1 to 3% impact on operating profits for every

one rupee appreciation)

Strengths

• Strong expertise in the area of Recombinant Biotechnology (3 products launched)

• Strong presence in the European market (50%+ revenue comes from Europe)

• Significant ramping up of the US business (22 products marketed)

• Presence in lifestyle related diseases in India (Diabetes, Nephrology)

Opportunities

• Leverage on synergies present in the European market

• Aggressive growth in the US market (30 products pending approval)

• Introduction of Bio-generics in regulated markets (market size pegged at $10 bn)

Swot Analysis -



Reasons for Under-performance

• The company had to incur huge charge-back expenditure of Rs. 376mn which impacted

its performance severely in CY06

• The company’s performance was also affected due to expenditures incurred of

Rs.228mn in a failed acquisition in the US in CY06

• The company entered very late in the US market. It had just 5 products in the US market

by the end of CY2005

• It has a highly leveraged balance sheet with debt-equity ratio of 1.85x and lower than

expected growth in CY06, which had a negative impact on the price of the stock.

• Consolidated margins came down in CY06 due to the acquisition of Pinewood and

Dumex as the latter was a loss making company when Wockhardt acquired it.

Key Positive Catalysts

• Marketing and manufacturing synergies generated from various acquisitions in the

European market will help the company improve net profit margin in excess of 15%.

• Presence across the largest generic pharmaceutical markets in Europe gives

substantial leverage to the company to take advantage of the low genericisation in

these markets.

• The company’s revenue from the US market will grow at a high rate due to low

penetration and strong product pipeline.

• The domestic business will be above industry growth due to significant presence in

the chronic therapy areas.

• The company’s expertise in biotechnology segment will give it a huge opportunity of

introducing bio-generics in regulated markets.

• The company may strike another lucrative acquisition deal because it has huge cash

available with it.

• With the conversion of FCCB, the Debt-Equity ratio will come down to about 0.64x by

CY08



If we compare Wockhardt with its peers on financial parameters, Wockhardt’s performance is very good as

compared to Dr Reddy & Ranbaxy in terms of return ratios and profitability ratios. Also, in terms of growth prospects

in CY07 and CY08, it ranks just a notch below Glenmark but much above other companies. If we compare

Wockhardt with other companies like Orchid Chemicals and Torrent, which are also trading at low PE ratios,

Wockhardt has much better financials than them in terms of margins as well as return ratios. On valuation

parameters, Wockhardt is clearly trading very cheap as compared to other frontline pharma companies.

Companies Year Net Revenue Net Revenue EPS EPS Price P/E

(Rs. mn) Growth(%) (Rs.) Growth(%)

Wockhardt CY07E 25907 49.8 35.1 59.1 373.0 10.6

CY08E 32983 27.3 43.9 25.1 8.5

Glenmark Pharma FY08E 17736 46.9 39.2 51.8 653.0 16.7

FY09E 23708 33.7 50.3 28.3 13.0

Sun Pharma FY08E 26905 24.8 43.6 25.2 905.5 20.8

FY09E 31960 18.8 51.5 18.1 17.6

Ranbaxy CY07E 83560 17.5 22.0 23.0 371.5 16.9

CY08E 97110 16.2 27.7 25.8 13.4

Dr. Reddy FY08E 54341 -11.6 36.5 -21.8 631.0 17.3

FY09E 67966 25.1 46.8 28.1 13.5

Orchid Chemicals FY08E 11330.00 15.10 21.36 78.00 211.55 9.9

FY09E 13030.00 15.00 25.83 20.92 8.2

Lupin FY08E 22765.00 18.20 35.25 23.27 627.25 17.8

FY09E 24055.00 5.66 36.30 3.00 17.3

Torrent Pharma FY08E 14865.00 15.90 16.70 50.00 220.40 13.2

FY09E 17035.00 14.59 22.10 31.33 10.0

Companies Year ROCE(%) ROE(%) OPM(%) NPM(%)

Wockhardt CY07E 16.0 31.2 23.0 14.8

CY08E 19.0 28.2 23.8 16.0

Glenmark Pharma FY08E 33.1 45.8 38.1 27.6

FY09E 31.9 35.5 36.6 26.7

Sun Pharma FY08E 35.5 35.6 32.1 33.5

FY09E 37.6 32.2 31.7 33.2

Ranbaxy CY07E 13.1 27.3 16.8 10.6

CY08E 14.9 27.5 17.2 11.4

Dr. Reddy FY08E 10.6 15.2 20.7 11.3

FY09E 12.2 16.9 20.0 11.6

Orchid Chemicals FY08E 13.50 8.50 31.80 12.50

FY09E 17.00 11.00 32.50 16.00

Lupin FY08E 22.50 21.80 17.90 13.00

FY09E 19.70 19.00 16.80 12.60

Torrent Pharma FY08E 20.70 29.60 14.90 9.49

FY09E 23.60 30.70 15.90 10.95

Peer Comparison

Source : Industry, HDFC Sec Research




We can see that from the beginning of 2004 till the end of 2005, Wockhardt was continuously

re-rated and had a PE multiple of 15x to 20x on a forward basis. But the charge-back provisions

and one-time expenses related to the failed acquisition in the US in the beginning of CY06

caused a sharp fall in its rating.

We feel that with excellent growth in the US business in the last couple of quarters and its 3

successful acquisitions in the last year, the concerns on US business growth and acquisition

strategies have vanished and the stock will be re-rated. Also, over the years, Wockhardt has

gained significant expertise in biotechnology and diabetology markets. The company is on

the threshold of capturing the huge opportunity in the bio-generic segment by launching

products in various regulated markets. It has also shown significant improvement in its

business activities in these markets. Wockhardt still has huge cash on its balance sheet for

further acquisitions. It has been growing at a rapid pace in the domestic market as well.

Looking at the company’s growth potential and various initiatives taken, we feel the stock is

very cheaply valued and has immense potential for value appreciation.

We recommend BUY on the stock with price target of Rs.570

1 yr Fwd PE

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Particulars Wockhardt Ltd Sun Pharma Ranbaxy Dr. Reddy

Price (Rs.) 373.00 905.50 371.50 631.00

Mcap (Rs. bn) 40.82 176.52 138.52 105.96

P/E 12.38 21.41 18.94 10.35

EV/Sales 2.40 7.99 2.84 2.03

EV/EBIDTA 10.04 18.51 13.95 7.04

At the current price of Rs. 373, the stock is trading at PE ratio of 12.4x and EV/EBIDTA of 10x

on TTM basis. On most parameters, Wockhardt is trading at a significant discount to its

peers like Ranbaxy and Sun Pharma etc. We feel the worst is already over for Wockhardt and

the company is ramping up its business rapidly across geographies and therapeutic areas.

On the basis of our estimated EPS of Rs. 35.1 for CY07 and Rs. 43.9 for CY08, the stock is

trading at a forward PR ratio of 10.6x and 8.5x respectively.

The company is trading at an

attractive forward PE of 11.3x and 9x

on CY07 and CY08 basis



About the Company

Wockhardt Ltd is one of the largest integrated pharmaceutical companies in India. It has

developed a strong presence in the European market with its operations spread across UK,

Germany, France and Ireland. Wockhardt was originally promoted in 1959 as Worli Chemicals.

Later in 1973, it got incorporated as Wockhardt Ltd. The company has made several

acquisitions in the domestic and international markets in the last decade. Currently, about

65% of the revenues come from international markets (54% Europe, 7% US). It specializes

in anti-infective, pain & inflammation, cough, psychiatry, medical nutrition and biotechnology

segments. It has multi-disciplinary R&D capabilities with more than 450 scientists on rolls.

Till date, the company has developed 6 biotech products. It has also entered into various

strategic alliances with international players like Amylin, Eli Lilly, Eisai etc.

The company has 11 manufacturing facilities in India, UK and Ireland. It has also built India’s

largest biotech complex at Aurangabad. It has research & development facilities at the Biotech

Park.

Wockhardt has already received USFDA approval for 7 of the 8 manufacturing facilities in

India. The UK plant is both USFDA and MHRA approved. Manufacturing facilities at Ireland

and France are also MHRA approved.

The company is actively involved in R&D activities. It has about 400 scientists working at its

R&D center of whom more than 150 are PhDs. Its research encompasses process

engineering for APIs (bulk drugs), new chemical entities, novel drug delivery systems [NDDS]

and biologic research.

Wockhardt has established a strong presence in the domestic market. It has a significant

presence in pain management, cough therapy, psychotic drugs, diabetology, vaccines,

nutrition and animal health. It is a leading player in the nutraceutical and nephrology segments

in India. In the domestic market, it has six different therapeutic divisions.

Wockhardt is the largest

pharmaceutical company present

in Europe

Over the years the company has

developed strong expertise in

biotech and research

Business Model

Formulation R & D ROW

Wockhardt

US Europe India ROW Domestic International

NCE Generic Biologics

Source : Company



Acquisition History of Wockhardt

Wockhardt has made several acquisitions in Europe in all major European markets, including

Ireland.

Over the years, Wockhardt has substantially brought down its reliance on its Indian business.

Currently, the company derives only about 25% revenue from the domestic market. The

proportion was 90% in 1994 and 80% in 1999. European markets provide over 60% of the

total revenue. Currently, the US market contributes about 10% of the total revenue, but we

believe that going forward, this proportion will increase substantially.

Acquired Company Sales Expected (Rs. mn) Contribution to Revenue Current Status

CY07(E) CY08(E) CY07(E) CY08(E)

Pinewood Laboratory 3386.60 3996.188 13% 12.10% Company is achieving synergies through crossintroduction of its products. Pinewood is makingoperating margins in excess of 20%

Dumex India 800 1000 3.10% 3.00% When acquired it was loss making company. Wockhardtmanaged to breakeven within 6 months and sales isgrowing well

Negma 3587.50 7072.5 13.80% 21.40% Company will leverage on its to brands Diacerein &Nebivolol by introducing it in other markets; Company

plans to improve operating margins more than 20%

Acquired Company Year Country Deal Size EV/Sales Purpose

Wallis Laboratory 1998 UK $8mn Strategic entry into European marketMerind 1998 India NA NA For expansion of therapeutic coverageCP Pharmaceuticals 2003 UK $18mn 0.3x Establish significant presence in UKEsparma GmbH 2004 Germany $11mn 0.6x Strengthning presence in European marketDumex India 2006 India NA NA Acquiring nutrition brandsPinewood Laboratory 2006 Ireland $150mn 2.1x Entering branded generic market of IrelandNegma 2007 France $265mn 1.8x Entering fast growing generic market of France

Earlier Acquisitions

The company had successfully integrated its earlier acquisitions of CP Pharma, Wallis Lab and Esparma with its Indian operations.

It shifted Esparmas production to its UK facility and then transferred the production of many high value drugs from its UK facility to its

Indian factories. The company currently earns about 22% margin from its core European operations. These acquisitions are

expected to contribute 26.6% and 24% to topline respectively in CY07 and CY08.

Source : Company, HDFC Sec Research

Source : HDFC Sec Research



It can be seen from the diagrams above that the revenue share from the European market

will increase substantially from 40% in CY06 to about 54% in CY07. The major reason for

this increase would be that the full impact of Pinewood acquisition will occur in this year. Also

Negma will contribute in the later part of CY07.

US Business – Gearing for a substantial growth

Wockhardt was the first Indian company to get an ANDA approval way back in 1995. But later,

the company lagged behind in US market expansion. Earlier, it followed the partnership

model to market its products in the US. In 2002, it had a supply agreement with Ranbaxy for

two products. Similarly in UK, it had a supply agreement with IVAX. But now it has set up its

own marketing front-end to capture the entire value chain.

With the marketing front-end in place, the company ramped up its ANDA fillings from 17 in

FY05 to 26 in FY06. It has a pipeline of 30 pending ANDAs. It plans to file over 30 ANDAs in the

current year. 40% of the company’s filings are in the injectible category, sold in hospitals,

where the competition is relatively less. The price erosion in the cephalosporin segment is

low at 80-85%. The company recorded $25mn in US revenues in FY06. Wockhardt currently

markets 22 products in the US market. It has got a record eight ANDA approvals in the last

four months.

CY06

ROW6%

India38%

API10%

Europe40%

USA6%

CY07E

ROW4%

India28%

API7%

USA7%

Europe54%

CY05

ROW6%

India36%

API12%

USA7%

Europe39%

Wockhardt is ramping up its US

business and has received a record

number of ANDA approvals in the

last five months

CY08E

ROW4%

India24%

API6%

Europe58%

USA8%




US Product Status

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CY2005 CY2006 CY2007(E)

ANDA Pipeline Product Approvals

SWOT analysis for the US business

Strengths

• Strong ANDA pipeline (More than 30 ANDAs awaiting

approval)

• Strong expertise in the injectibles segment (6 injectibles

approved)

Weaknesses

• Late effective entry into the already saturated US generic

market (in 2004)

Opportunities

• Low penetration till date (Less than 10% revenue comes

from the US market)

• Huge scope for bio-generic market going forward (market

size pegged at $10bn)

Threats

• Severe pricing pressure could erode margins (price

erosion more than 95%)

• Regulatory issues may delay approvals

Date Drug Indication Market Size Growing at

09-Jul-07 Fosphenytoin Injestions Epileptic seizures $73mn 15%

20-Jun-07 Cefprozil Respiratory tract $51mn 10%

and skin infection

01-Jun-07 Terbinafine Fungal infection $680mn 10%

21-May-07 Zolpidem Sleep disorder $2.2bn 13%

24-Apr-07 Lisinopril Blood pressure $375mn 3%

17-Apr-07 Ceftriaxone Infection $200mn 5%

29-Mar-07 Ketorolac Inflammation $36mn 7%





Europe – Gain from Synergies

Wockhardt has so far acquired five companies in Europe. It has a clear plan of attaining

synergies among these businesses and geographies. Wockhardt shifted the entire

manufacturing facilities of Wallis’s Luton to CP Pharma’s facilities. Then it shifted the

production of high value products from CP Pharma to India to take advantage of lower cost.

It also plans to sell CP Pharma’s product basket in Germany due to the mutual recognition

of products in that country. It has similar plans for Negma and Pinewood’s products. It has

strong marketing set ups in the four countries where it has made acquisitions. So, going

forward, it will be very easy for Wockhardt to use these marketing and manufacturing synergies

to leverage its European acquisitions. Moreover, the generic penetration in Europe is relatively

low, which gives Wockhardt an opportunity to increase its presence in the European generic

market. WPL aims to launch more than 40 products in the European market in FY07. Higher

CRAMS business will also contribute to growth.

Europe has traditionally been a less genericised market. As shown in the table, the generic

penetration in various European markets is very low, especially in France where the company

has made its latest acquisition. Due to rising healthcare costs, It will be imperative for these

companies to substitute generics to branded products going forward. This gives significant

opportunities for generic players in the European market. As Wockhardt has already

established a strong presence in the European market through its various acquisitions in

the past, it is set to gain from the increasing generic market size in various European

countries.

Generic Market Growth in the European market

Countries Pharma Market Generic Market YoY Growth Generic

Size($bn) Size ($mn) (%) Penetration (%)

Germany 24 5496 4 23

France 22 1308 42 6

UK 15 2904 29 19

Italy 14 276 20 2

Spain 10 468 20 5

CP Pharma’s acquisition – Big growth driver for UK business

Wockhardt acquired CP Pharma in 2003 for $18mn, less than 0.5x times on an EV/Sales

basis. The company gained a major presence in the UK generic market through this

acquisition and became one of the top 10 generic companies there. Due to CP Pharma’s

significant presence in the hospital segment, Wockhardt became the number two player in

this segment. The company also got the lucrative CRAMS business through this acquisition.

Esparma – Wockhardt’s gateway to Europe’s largest pharma market

In 2004, the company entered Europe’s largest pharmaceutical market Germany, through

the acquisition of a German pharmaceutical company, Esparma. Germany is a relatively low

genericised market compared to UK, giving it a good opportunity to expand its business. The

deal size was $11 million. Esparma has a strong presence in urology, neurology and

diabetology sectors, which have obvious synergies with Wockhardt’s therapeutic strengths.

During the acquisition, it had a portfolio of 135 marketing authorizations. It also had nine

international patents and 94 trademarks. Wockhardt acquired only the sales and marketing

arm of Esparma. It then gradually shifted the manufacturing activities to its plant in UK.

The company has grown

inorganically in the European

market with five acquisitions in the

past

Low genericisation of European

pharmaceutical markets offers the

company huge opportunities

CP Pharma’s acquisition catapulted

Wockhardt into a major player in

UK

Esparma gave the company entry

into Europe’s largest

pharmaceutical market




Pinewood Acquisition – Strategic fit

Wockhardt acquired Pinewood Laboratories in 2006 and established its presence in Ireland.

Pinewood is the fastest growing and also the largest branded generic company in Ireland.

The deal size was $150mn, valued at two times its sales and 10 times the EBIDTA. For the

year ending June’06, it recorded revenues of USD 70 mn. It has been growing at 20% CAGR

in the last five years. Over 50% of Pinewood’s revenue comes from the branded generics

market in Ireland, 40% from the UK and the balance from exports. We believe the acquisition

has brought many synergies into the company’s European operations as it plans to leverage

on product and marketing synergies through them. Currently, Pinewood’s operating margins

are close to 20%. Going forward, the margins are expected to improve further. Pinewood has

more than 200 marketing authorizations.

Negma – Wockhardt’s largest acquisition so far

This marked Wockhardt’s entry into another big European market, the less genericized

France. The total deal size was $250mn. Negma reported sales of $150mn, translating into

EV/Sales valuation of 1.6x. The valuation was reasonable. Negma is the fourth largest

integrated pharmaceutical company in France with its own patented products and

manufacturing facilities. It has 172 product patents. We believe, Wockhardt will manage to

leverage on the distribution strengths of various companies it acquired in Europe to market

Negma’s patented products. Two of Negma’s products, Diacerein and Nebivolol contribute

90% to the top line. The management has guided patent protection for Diacerein till 2016.

Pinewood acquisition gave

Wockhardt a strong foothold in

branded generic market

Negma enabled Wockhardt to

enter low genericised French

market

European Business Growth

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12,000

14,000

16,000

18,000

20,000

2005 2006 2007(E) 2008(E)

(Rs.

Mn)

Strengths

• One of the largest players in France (4th largest)

• Portfolio of strong branded drugs (Diacerein & Nebivolol)

Weaknesses

• R&D pipeline for new molecules is weak. (No major

molecule in advanced stages)

Opportunities

• Diacerein and Nebivolol can be introduced in other

European markets

• R&D facility can be used effectively to support Indian R&D

operations

Threats

• Low genericisation of French market will cause problems

in launching new drugs




SWOT analysis for European business

Strengths

• Presence in the largest generic markets in Europe (UK,

Germany, France, Ireland)

• Largest Indian pharmaceutical company in Europe

(Revenue expected for CY07 is Rs.13.87bn)

Weaknesses

• The company cannot attain full manufacturing synergies

due to various regulations

Opportunities

• Bio-generic market can give huge opportunity going forward

(Size pegged at about $10bn)

• Low genericisation in various markets like France gives

huge opportunities (7% generic penetration)

• The company can benefit from huge marketing and

manufacturing synergies

Threats

• Regulatory aspects in various European markets can hurt

growth prospects

• Increasing competition in European market (Top 5 Indian

companies are already present in Europe)

ROW – Biopharmaceuticals will lead the pack

Bio-generic sales in less regulated markets stood at $12mn. The company increased its

registrations significantly from 26 in FY05 to 61 in FY06. The full impact of these revenues

would come in FY07. It has more than 130 registrations in the pipeline. To grow its biotech

business, the company has set up joint ventures and subsidiaries in various countries.

In Brazil, it has set up its own subsidiary called Wockhardt Farmaceutica do Brasil Ltda,

which has formed marketing alliances with local companies for selling Wockhardt’s biotech

portfolio.

In Mexico, it has entered into a JV with Representaciones E Investigaciones Medicas, S.A de

C.V to market its products.

In South Africa, it has entered into a JV with Pharmadynamics to market biotech products.

India – Building strong capabilities

In the domestic market, Wockhardt has a strong sales force of 1200+ medical representatives.

It has six brands among the top 300 in the industry. The domestic formulation business

recorded a growth of 28% YoY, partially supported by the acquisition of Dumex. Excluding the

impact of Dumex, the growth was 22% higher than the industry average. Wockhardt’s focus

on building its expertise in lifestyle segments like Diabetes and Nephrology is paying off as

it has consistently shown growth rates higher than the industry average. We feel, it will

continue to do so in the long term.

Wockhardt acquired Dumex from Royal Numico NV in June 2006 along with its 2 fast growing

brands Protinex and Farex. Protinex is the market leader and the largest prescribed brand in

its category. Protinex sale has been growing at over 20% in the last few years. Farex is one of

the largest selling infant nutrition foods. These two brands contribute over Rs. 600mn in

sales. Wockhardt has created a specialized division Nutri-Uno, to market these products.

The company achieved break even in this deal within 6 months of the acquisition.

One of the largest players in

domestic markets

Dumex has strengthened

Wockhardt’s nutrition business



Wockhardt has also signed two in-licensing deals. It recently in-licensed an anti-wrinkle

product B-Lift from Syrio Pharma of Italy and Kelocate, a silicone gel to treat scars, from

Advanced Biotechnologies of the US. In January 2007, it in-licensed Viticolor, a skin camouflage

gel for topical application for vitiligo patients from Crawford Healthcare of UK and Vitix,

another drug for leucoderma from LSI of UK. Wockhardt is also very keen on the in-licensing

products business, as it has good distribution and marketing capabilities in place.

The company has divided its domestic businesses in different categories according to

various therapeutic areas. Currently, it has six divisions - Wockhardt Pharma, MCC,

Superspeciality, Merind Pharma, NutriUno & SkinUno. Over the years, the company has

increased its focus on chronic diseases, a segment which is growing at a much faster rate

and has clear revenue visibility.

Wockhardt has consistently beaten market growth in the domestic market, quarter on quarter,

with new product introductions and also inorganic growth initiatives. We feel going forward,

increasing business from biotech products and the chronic segment, will help the company

outperform the industry’s average growth rate.

Domestic Therapeutic break up

CVS3%

Diebetology8%

Pain18%

Anti-infectives13%

Dermatology5%

Others10%Respiratory

12%

Nephrology2%

CNS7%

Neutraceuticals22%

Indian Formulation Growth (%)

0

5

10

15

20

25

30

CY04 CY05 CY06

Industry Grow th Wockhardt Grow th

Wockhardt has consistantly beaten

average domestic market growth

Source : Company




CRAMS – Plethora of opportunities

Wockhardt has successfully ventured into one of the fastest growing pharmaceutical business

domains of CRAMS. It has been supplying Byetta, an injectible diabetes drug to Amilyn. Eli

Lilly markets the drug worldwide. The company recently expanded the Byetta manufacturing

capacity four-fold to cater to rising demand. Recently, it signed another deal with Amylin for

the supply of finished dosage form of SYMLIN injection in cartridges for use in a pre-filled

disposable pen injection device. We feel that going forward, Wockhardt will manage to clinch

a few more out-licensing deals.

Biotech – Wockhardt’s forte

Biotechnology products have been identified as the future in the treatment of diseases.

Currently, it is estimated that the global bio-pharmaceutical market size is more than $50bn.

Globally, the NCE pipeline of major pharmaceutical companies is drying up and R&D

productivity falling. Companies are increasingly focusing on biotechnology products for future

growth. Wockhardt is among the few biotech companies with a potential to leverage the

opportunity biotech will throw up going forward.

The company is working towards the introduction of insulin and erythropoietin in EU and the

US market and expects to file the first registration by the end of FY07. It will take about 18

months to get an approval. Erythropoietin market size is approximately $11bn worldwide

representing a significant opportunity for Wockhardt. Biotechnology medicines for diabetes

command more than $5bn revenue worldwide.

Research & Development – At a nascent stage

Wockhardt is one of the few players in the Indian pharmaceutical space to develop strong

R&D capabilities. It has a strong team of 400+ scientists at its R&D facility in Aurangabad

Biotech Park. Though till date, the company has not got any success in clinching out-licensing

deals, we feel going forward, one can’t deny such a possibility. Currently the company spends

about 4-5% of its revenue on R&D every year.

Biotech

NewChemical

EntityGenerics

Research &Development

Research Focus

Wockhardt has already introduced

3 biotech products in the domestic

market

The company has developed

expertise in NCE and biotech

research



NCE Indication Form Early Preclin. Adv Preclin. Phase I Phase II

WCK 771 MRSA, resistant infections IV

WCK 1152 Respiratory infections Oral IV

WCK 2349 MRSA, resistant infections Oral

WCK 2370 MRSA, resistant infections Oral

WCK 2664 Gram +ve MRSA, VRE, VISA resist. Oral IV

WCK 1734 Skin Infect. Topical

Research Pipeline Details

Concerns

• In case of non-conversion of FCCB, the company will have to incur additional liability of

$140 mn in the year 2009.

• Conversion of FCCB will lead to 9.1% equity dilution from Rs 547 mn to Rs599 mn

going forward.

• Any regulatory changes in the European generic market could tweak the growth

prospects of the company there.

• The company may not be able to introduce bio-generics in regulated markets very

soon in case regulatory procedures are not in place in the near future.

• Severe competition is building up in Europe with all the frontline Indian companies like

Ranbaxy & Reddy establishing its presence there. Also, there is huge competition in

the US market from Indian companies like Orchid Chemicals and Lupin, particularly in

the cephalosporin segment.

• Impact of rupee appreciation on companies’ operating performance will be less than

1% in case of appreciation of Rs. 1 against the dollar and will be less than 3% in case

of appreciation of Rs. 1 against European currencies.

Source : Company



Financials

(Rs. mn) CY05 CY06 CY07(E) CY08(E) CAGR (%)

USA 1004 1062 1859 2788 41

Europe 5516 6988 13872 19001 51

RoW 864 1053 1106 1216 12

India 5083 6508 7224 7946 16

API 1654 1679 1847 2032 7

Total 14121 17290 25907 32983 33

The company has shown very good performance in its revenues over the years. The revenue

grew by CAGR 22% in last 3 years. It is very much evident from the table below that it is doing

exceptionally well in regulated markets.

Net Revenues

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

CY04 CY05 CY06 CY07(E) CY08(E)

(Rs.

Mn)

Operating Profit

0

1,000

2,000

3,000

4,0005,000

6,000

7,000

8,000

9,000


(Rs.

Mn)

Net Profit

0

1,000

2,000

3,000

4,000

5,000

6,000


(Rs.

Mn)

CAGR 24%

CAGR 29%

CAGR 25%




Income Statement

Financial Year CY04 CY05 CY06 CY07(E) CY08(E)

Net Revenue 12516 14130 17290 25907 32983

Net Raw Material Cost 5219 5771 6678 9845 12204

Employee Cost 1642 1859 2532 3886 4947

R&D 652 683 610 907 1154

Selling & Distribution & Admin exp 2191 2531 3467 5440 6926

Total Expenditure 9704 10844 13287 20078 25232

Operating Profit 2812 3286 4003 5829 7058

Other income 158 180 190 130 99

Operating Profit (incl. Other Income) 2970 3466 4193 5959 7850

Interest -16 95 26 593 524

Gross Profit 2986 3371 4167 5366 7326

Depreciation 368 426 621 683 751

Profit Before Tax & EO Items 2618 2945 3546 4683 6575

Extra Ordinary Exps/(Income) 113 0 604 0 0

Profit Before Tax 2505 2945 2942 4683 6575

Tax 370 374 529 843 1315

Current Tax 214 356 269

Deferred Tax 156 18 260

Net Profit 2135 2571 2413 3840 5260

(Rs. Mn)

Balance Sheet


Sources of Funds

Equity Capital 545 547 547 547 599

Preference Capital 0 0 0 0 0

Share Premium Account 28 117 134 134 5122

Reserves (excl Rev Res) 5593 7497 9982 13274 17696

Net Worth 6166 8161 10663 13956 23417

Secured Loans 4082 4124 14751 14851 14926

Unsecured Loans 4832 4941 4952 4975 174

Total Loan Funds 8914 9065 19703 19826 15100

Deferred Tax Liability 600 618 921 1021 1321

Total Capital Employed 15680 17844 31287 34802 39839

Applications of Funds

Gross Block 7614 8384 18531 20384 22423

Less: Accumulated Depreciation 2631 2906 4549 5232 5984

Net Block 4983 5478 13982 15152 16439

Capital Work in Progress 1634 2403 3086 3586 4089

Investments 3 3 3 5 8

Current Assets, Loans & Advances

Inventories 2164 2747 4300 7028 7349

Sundry Debtors 2355 2810 4616 7450 8815

Cash and Bank Balance 7355 7139 9732 9454 10418

Loans and Advances 695 910 1424 1746 1958

Other Current Assets 0 0 0 0 0

sub total 12568 13605 20071 25678 28539

Less : Current Liabilities & Provisions

Current Liabilities 3508 2561 4975 8618 8032

Provisions 1084 880 1001 1204

sub total 3508 3645 5856 9620 9236

Net Current Assets 9060 9960 14216 16059 19303

Misc Expenses 0 0 0

Total Assets 15680 17844 31287 34802 39839

(Rs. Mn)

Financials



Cash Flow - Consolidated


Earnings Before Tax 2506 2945 2942 4683 6575

Depreciation 368 426 621 683 751

Misc Exp W/off 4 5 13

Interest Paid 200 261 409 593 524

Interest Recd. (50) (249) (284)

Change in WC (698) (1074) (1696) (2120) (2281)

Direct Taxes Paid (208) (371) (557) (743) (1015)

Others (29) 104 438

Cash Flow from Operations 2093 2047 1886 3095 4554

Capex Incurred (1582) (1741) (2709) (2353) (2541)

Interest & Dividend Received 51 253 406

(Inc)/Dec in Investments (3) (1) 0 (2) (2)

Others 15 32 (6459)

Cash Flow from Investing Activities (1518) (1456) (8763) (2355) (2543)

Inc/(Dec) in Share Capital 0 1 0 0

Share issue Expenses

Inc/(Dec) in Share Premium 8 13 10 0

Inc/(Dec) in Debt 5656 37 10564 123 76

Dividends Paid+Dividend Tax (307) (615) (621) (547) (599)

Interest Paid (160) (306) (414) (593) (524)

Others

Cash Flow from Financing Activities 5198 (871) 9539 (1017) (1047)

Net Change in Cash Balance 5772 (281) 2662 (277) 963

Consolidated Adjustment 52 65 (69)

Opening Cash Balance 1530 7355 7139 9732 9454

Closing Cash Balance 7355 7139 9733 9454 10418

Ratio Analysis


Growth Metrics

Net Revenue(%) 33.0 12.9 22.4 49.8 27.3

EBIDTA(%) 52.1 16.9 21.8 45.6 33.0

Net Profit(%) 50.3 20.4 (6.1) 59.1 37.0

EPS(%)* 50.3 20.1 (6.3) 59.1 25.1

Profitability Metrics

EBIDTA Margin(%) 23.7 24.5 24.3 23.0 23.8

Net Profit Margin(%) 17.1 18.2 14.0 14.8 15.9

B/S & Return Ratios

ROCE(%) 31.7 18.1 12.1 16.0 19.0

ROE(%) 69.3 35.9 25.6 31.2 28.2

Book Value (Rs.) 56.6 74.7 97.4 127.5 195.5

D/E(x) 1.4 1.1 1.8 1.4 0.6

Interest Coverage Ratio(x) (185.6) 36.5 161.3 10.0 15.0

Current Ratio(x) 3.6 3.7 3.4 2.7 3.1

Valuation Metrics

P/E(x) 15.2 18.9 19.9 10.6 8.5

P/B(x) 5.3 5.9 4.5 2.9 1.9

EV/Sales(x) 2.7 3.6 3.4 2.0 1.5

EV/EBIDTA(x) 7.3 9.2 14.5 8.8 6.4

* Bonus and split adjusted growth in CY04

(Rs. Mn)



INSTITUTIONAL SALES / DEALING Tel No.: (022) 2490 4860 Fax: (022) 2490 4899 Contact Nos.

Sanju Verma Head of Institutional Equities & Derivatives [email protected] 91-22-6661 1859Kartik Broker Sales [email protected] 91-22-2490 4865Milauni Vibhakar Sales [email protected] 91-22-6661 1808Hursh Chordia Sales [email protected] 91-22-2490 4987B. Ganesh Sales [email protected] 91-22-2490 1800Samir Shah Sales Trading / Dealing [email protected] 91-22-2490 1800Jayesh Kumar Sales Trading / Dealing [email protected] 91-22-2490 1800Manish Mehta Sales Trading / Dealing [email protected] 91-22-2490 1800Manoj Patil Sales Trading / Dealing [email protected] 91-22-2490 1800Nilesh Waghela Sales Trading / Dealing [email protected] 91-22-2490 1800Brijesh Sanghrajka Sales Trading / Dealing [email protected] 91-22-2490 1800Saurabh Sarang Sales Trading / Dealing [email protected] 91-22-2490 1800Piyush Raja Sales Trading / Dealing [email protected] 91-22-2490 1800Nayan Shah Sales Trading / Dealing [email protected] 91-22-2490 1800Mukesh Ruparel Sales Trading / Dealing [email protected] 91-22-2490 1800Rahul Thakar Sales Trading / Dealing [email protected] 91-22-2490 1800Dinesh Mukadam Sales Trading / Dealing [email protected] 91-22-2490 1800RESEARCH Tel No. (022) 6661 1700 Fax: (022) 2496 5066 Contact Nos.Mukesh Agarwal Analyst [email protected] 91-22-6661 1753Milind Masrani Analyst [email protected] 91-22-6661 1844Gauri Vaideeswaran Analyst [email protected] 91-22-6661 1714Navin Sahadeo Analyst [email protected] 91-22-6661 1872Amit Mahawar Analyst [email protected] 91-22-6661 1820Surjit Singh Arora Analyst [email protected] 91-22-6661 1791Jonas Bhutta Analyst [email protected] 91-22-6661 1731Amit Shah Analyst [email protected] 91-22-6661 1828Rajesh Zawar Analyst [email protected] 91-22-6661 1864Yogesh Pareek Analyst [email protected] 91-22-6661 1758PRODUCTION & DATABASE Tel No.: (022) 6661 1700 Fax: (022) 2496 5066 Contact Nos.Vinod Menon Editor [email protected] 91-22-6661 1768Mahendra Karande [email protected] 91-22-6661 1843Geetanjali Ovalekar [email protected] 91-22-6661 1731

RATING SYSTEM

BUY = Expected to outperform the BSE Sensex by 15% or more over a 12 months’ time frame.

MO = Market Outperformer - Expected to outperform the BSE Sensex by 10% or more over a 12 months’ time frame.

MP = Market Performer - Expected to be a neutral performer relative to the BSE Sensex over a 12 months’ time frame.

MU = Market Underperformer - Expected to underperform the BSE Sensex by 10% or more over a 12 months’ time frame.

SELL = Expected to underperform the BSE Sensex by 15% or more over a 12 months’ time frame

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Documents

Wockhardt Company Report