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Investment Rationale
Reasons to Buy
• The biotechnology story
• EU and US – Key growth drivers
• Capitalising on Pinewood
• The French connection
• The 'India story'
Reasons not to Buy
• High debt equity ratio
• Volatile currency movements
• Competition lurks
• Rest of the World fails to perform
Background
Wockhardt Ltd, a subsidiary of Khorakiwala Holdings and
Investments Pvt. Ltd (75% stake), is one of the leading
domestic pharmaceutical companies with strong presence in
the lifestyle segment and a growing focus on biotechnology.
With acquisitions in the international markets, the company has
demonstrated its growing global ambitions. During CY08,
Wockhardt derived 75% of its revenues from non-India regions
(71% in CY07). The company has proven its R&D capabilities
by indigenously developing and launching Biovac-B (Hepatitis-
B vaccine), Wepox (Erythropotein) and Wosulin (human
insulin).
Background
Wockhardt Ltd, a subsidiary of Khorakiwala Holdings and Investments Pvt. Ltd (75% stake), is one of the leading domestic
pharmaceutical companies with strong presence in the lifestyle segment and a growing focus on biotechnology. With
acquisitions in the international markets, the company has demonstrated its growing global ambitions. During CY08,
Wockhardt derived 75% of its revenues from non-India regions (71% in CY07). The company has proven its R&D
capabilities by indigenously developing and launching Biovac-B (Hepatitis-B vaccine), Wepox (Erythropotein) and Wosulin
(human insulin).
Reasons to buy
The biotechnology story: Wockhardt has 3 key products in the biotechnology field - 'Wepox'
(Erythropotein), 'Wosulin' (human insulin) and 'Biovac-B' (Hepatitis-B vaccine). While biotech revenues
accounts for just 3% of total revenues, this folio is likely to gain significant traction going forward.
Biotechnology is a highly niche area having higher barriers to entry as compared to other fields. These
entry barriers are in terms of stringent regulations, complex technology involved and longer lead times in
developing products. This is an area where we believe Wockhardt has an edge over its peers such as
Ranbaxy and Dr.Reddy's.
At present, Wockhardt's biopharmaceutical revenues are largely from India and the semi-regulated
international markets with 'Wepox' and 'Wosulin' being the key growth drivers. In the US, at present, the
guidelines with respect to biogenerics are not very clear. However, in the EU, the European authorities
have come up with draft guidelines with respect to 4 biologicals, insulin being one of them. Wockhardt
intends to enter this market by first launching insulin and erythropotein (EPO).
EU and US - Key growth drivers: Wockhardt intends to strengthen its presence in the US going forward.
The world's largest pharma market (in value terms) formed 18% of consolidated revenues in CY08. In the
US market, we believe that the company's focus on injectables will be the key as this field too has
relatively lesser competition due to the complex technology involved and high level of investment required.
Wockhardt had also acquired Morton Grove in the US in CY07, which is a leading liquid generic and
speciality dermatology company for US$ 38 m. Morton Grove had revenues of US$ 52 m with a portfolio
of 31 products, 13 of which enjoy the top position in the market. Around one third of Morton’s revenues
come from the branded ‘Lindane’ range of dermatological products. At the time of acquisition, Morton
Grove was not performing well due to lack of management focus and new product launches and reported
a loss at the EBDITA level to the tune of US$ 4 m. Wockhardt managed to turnaround this company in
CY08 through topline growth and cost rationalisation measures. This acquisition is expected to strengthen
Wockhardt’s presence in the dermatology space in the US generics market.
Wockhardt currently has over 25 products in the US market with 35 ANDAs pending approval. These
products include a mix of niche, sterile, NDDS, liquids and blockbuster products, with over US$ 25 bn in
brand value. Out of the products in the market, around one third is in the injectables space, which is an
area where there is relatively lesser competition as compared to solid dosage products. With the
acquisition of Morton Grove, Wockhardt’s product basket has now swelled to 56 products and is thus
expected to help Wockhardt attain critical mass in the US.
Besides the US, Europe is an important key focus area for Wockhardt. Inf act, Europe is now the single
largest contributor to its consolidated revenues (51% in CY08). Taking into account Wockhardt's product
folio and the synergies that emerge between its UK, Irish and French operations, we anticipate this
geography to be a strong growth for the company going forward.
Capitalising on Pinewood: Over the past couple of years, Wockhardt has been agile in acquiring a
global face, both through the organic and the inorganic route. The acquisition of CP Pharma in the UK and
'esparma GmbH' in Germany has given it access to two of the biggest generic markets in Europe.
Wockhardt acquired the Ireland-based company, Pinewood Laboratories in October 2006 for an enterprise
value of US$ 150 m for the purpose of entering the Irish market and strengthening its presence in the UK
region. Pinewood has over 200 prescription and over-the-counter products and is the market leader in
renal therapy products. Pinewood reported a compounded annual growth rate (CAGR) of 20% for the last
five years with EBITDA margin of over 20%. The acquisition of Pinewood has enabled Wockhardt
establish a stronger presence in the UK, Ireland and Germany. Also, as almost half of Pinewood’s sales
come from the UK, the acquisition will reinforce Wockhardt’s position in the UK. In the UK market,
Wockhardt is a strong player in the injectables (largely sold to hospitals) and solid dosages business and
Pinewood’s strengths in the liquids and creams business is expected to complement Wockhardt’s product
portfolio going forward. Besides, Wockhardt intends to leverage on Pinewood’s marketing and distribution
network and its customer business in Ireland for its varied range of hospital products.
In the UK market, Wockhardt is a strong player in the injectables (largely sold to hospitals) and solid
dosages business and Pinewood’s strengths in the liquids and creams business is expected to
complement Wockhardt’s product portfolio going forward. Besides, Wockhardt intends to leverage on
Pinewood’s marketing and distribution network and its customer business in Ireland for its varied range of
hospital products. We expect Pinewood’s revenues to grow at a CAGR off 11% between CY07 and CY10.
The French connection: In May 2007, Wockhardt acquired Negma Laboratories, the fourth largest
pharmaceutical group in France for US$ 265 m giving Wockhardt a foothold in the French generics
market, which has been valued at US$ 2 bn. With this acquisition, Wockhardt extended its presence in
Europe to four countries namely the UK, Germany, Ireland and France. This acquisition is expected to
further strengthen Wockhardt’s presence in the European region and capitalize on the generics potential
in France (the generics penetration in France is low and is expected to increase going forward with
pressure on the government to reduce healthcare costs).
The 'India story': In the domestic market, Wockhardt's competitive edge lies in the biotech space, largely
led by its brands 'Wepox' and 'Wosulin'. 'Wosulin' currently enjoys a market share of over 40% and is the
highest prescribed amongst the new prescriptions. Besides 'Wepox' and 'Wosulin', the company also
plans to launch 'Interferon' and 'Glargine' giving a further impetus to the domestic business. In-licensing
products especially in the dermatology segment is also part of Wockhardt's strategy to keep up the pace
of new product launches. The following table gives an indication of some of the in-licensing deals that the
company has entered into.
Reasons not to buy
High debt equity ratio: Wockhardt has taken a large amount of debt on its books to fund its acquisitions
particularly Pinewood and Negma. As a result, the debt equity ratio jumped to 4.3 in CY08 and this
includes the FCCB of US$ 110 m. The latter especially is due for redemption at the end of the year. Given
the cash crunch that the company is facing due to such high debt levels, it sold off its German operations
(Esparma), the nutritional business in India (with brands Farex and Protinex) and its animal health
business to raise cash. Plans on the anvil also include selling some more non-core assets to raise funds.
The debt equity ratio that the company has is currently way too high as compared to its domestic peers.
Volatile currency movements: Wockhardt is also susceptible to gyrations in the forex market and this
was quite apparent in CY08 when the company had to take on massive forex losses on its books. This
eroded its profitability and pushed the company into losses. While this scenario may not get replicated
anytime soon, the risks of volatile currency movements and its impact on Wockhardt’s financials cannot be
ignored. Given that foreign debt forms a large part of Wockhardt’s already inflated debt, Wockhardt is
more vulnerable as compared to its peers.
Competition lurks: The US and European generics market, where the company is currently present, is
witnessing cutthroat price competition and severe price erosion. Wockhardt is most likely to face the
pricing pressures, especially in the US market, once it starts acquiring scale in this region. Also, UK with
its highly competitive pricing environment continues to be an area for concern.
Rest of the World fails to perform: The Rest of the World (ROW) markets have failed to perform in the
last few years. The company has attributed this to the slow ramp up in the biotech products, exchange
rate issues and the fact that the company is trading cautiously in markets such as Russia. As a result, the
revenue visibility in these markets is hazy from a medium term perspective.
Capex
Since Wockhardt’s debt levels are high we have not assumed any capex for the next three years as
whatever funds the company is able to raise will be used to retire debt.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Investment Rationale
Reasons to Buy
• The biotechnology story
• EU and US – Key growth drivers
• Capitalising on Pinewood
• The French connection
• The 'India story'
Reasons not to Buy
• High debt equity ratio
• Volatile currency movements
• Competition lurks
• Rest of the World fails to perform
Background
Wockhardt Ltd, a subsidiary of Khorakiwala Holdings and
Investments Pvt. Ltd (75% stake), is one of the leading
domestic pharmaceutical companies with strong presence in
the lifestyle segment and a growing focus on biotechnology.
With acquisitions in the international markets, the company has
demonstrated its growing global ambitions. During CY08,
Wockhardt derived 75% of its revenues from non-India regions
(71% in CY07). The company has proven its R&D capabilities
by indigenously developing and launching Biovac-B (Hepatitis-
B vaccine), Wepox (Erythropotein) and Wosulin (human
insulin).
Background
Wockhardt Ltd, a subsidiary of Khorakiwala Holdings and Investments Pvt. Ltd (75% stake), is one of the leading domestic
pharmaceutical companies with strong presence in the lifestyle segment and a growing focus on biotechnology. With
acquisitions in the international markets, the company has demonstrated its growing global ambitions. During CY08,
Wockhardt derived 75% of its revenues from non-India regions (71% in CY07). The company has proven its R&D
capabilities by indigenously developing and launching Biovac-B (Hepatitis-B vaccine), Wepox (Erythropotein) and Wosulin
(human insulin).
Reasons to buy
The biotechnology story: Wockhardt has 3 key products in the biotechnology field - 'Wepox'
(Erythropotein), 'Wosulin' (human insulin) and 'Biovac-B' (Hepatitis-B vaccine). While biotech revenues
accounts for just 3% of total revenues, this folio is likely to gain significant traction going forward.
Biotechnology is a highly niche area having higher barriers to entry as compared to other fields. These
entry barriers are in terms of stringent regulations, complex technology involved and longer lead times in
developing products. This is an area where we believe Wockhardt has an edge over its peers such as
Ranbaxy and Dr.Reddy's.
At present, Wockhardt's biopharmaceutical revenues are largely from India and the semi-regulated
international markets with 'Wepox' and 'Wosulin' being the key growth drivers. In the US, at present, the
guidelines with respect to biogenerics are not very clear. However, in the EU, the European authorities
have come up with draft guidelines with respect to 4 biologicals, insulin being one of them. Wockhardt
intends to enter this market by first launching insulin and erythropotein (EPO).
EU and US - Key growth drivers: Wockhardt intends to strengthen its presence in the US going forward.
The world's largest pharma market (in value terms) formed 18% of consolidated revenues in CY08. In the
US market, we believe that the company's focus on injectables will be the key as this field too has
relatively lesser competition due to the complex technology involved and high level of investment required.
Wockhardt had also acquired Morton Grove in the US in CY07, which is a leading liquid generic and
speciality dermatology company for US$ 38 m. Morton Grove had revenues of US$ 52 m with a portfolio
of 31 products, 13 of which enjoy the top position in the market. Around one third of Morton’s revenues
come from the branded ‘Lindane’ range of dermatological products. At the time of acquisition, Morton
Grove was not performing well due to lack of management focus and new product launches and reported
a loss at the EBDITA level to the tune of US$ 4 m. Wockhardt managed to turnaround this company in
CY08 through topline growth and cost rationalisation measures. This acquisition is expected to strengthen
Wockhardt’s presence in the dermatology space in the US generics market.
Wockhardt currently has over 25 products in the US market with 35 ANDAs pending approval. These
products include a mix of niche, sterile, NDDS, liquids and blockbuster products, with over US$ 25 bn in
brand value. Out of the products in the market, around one third is in the injectables space, which is an
area where there is relatively lesser competition as compared to solid dosage products. With the
acquisition of Morton Grove, Wockhardt’s product basket has now swelled to 56 products and is thus
expected to help Wockhardt attain critical mass in the US.
Besides the US, Europe is an important key focus area for Wockhardt. Inf act, Europe is now the single
largest contributor to its consolidated revenues (51% in CY08). Taking into account Wockhardt's product
folio and the synergies that emerge between its UK, Irish and French operations, we anticipate this
geography to be a strong growth for the company going forward.
Capitalising on Pinewood: Over the past couple of years, Wockhardt has been agile in acquiring a
global face, both through the organic and the inorganic route. The acquisition of CP Pharma in the UK and
'esparma GmbH' in Germany has given it access to two of the biggest generic markets in Europe.
Wockhardt acquired the Ireland-based company, Pinewood Laboratories in October 2006 for an enterprise
value of US$ 150 m for the purpose of entering the Irish market and strengthening its presence in the UK
region. Pinewood has over 200 prescription and over-the-counter products and is the market leader in
renal therapy products. Pinewood reported a compounded annual growth rate (CAGR) of 20% for the last
five years with EBITDA margin of over 20%. The acquisition of Pinewood has enabled Wockhardt
establish a stronger presence in the UK, Ireland and Germany. Also, as almost half of Pinewood’s sales
come from the UK, the acquisition will reinforce Wockhardt’s position in the UK. In the UK market,
Wockhardt is a strong player in the injectables (largely sold to hospitals) and solid dosages business and
Pinewood’s strengths in the liquids and creams business is expected to complement Wockhardt’s product
portfolio going forward. Besides, Wockhardt intends to leverage on Pinewood’s marketing and distribution
network and its customer business in Ireland for its varied range of hospital products.
In the UK market, Wockhardt is a strong player in the injectables (largely sold to hospitals) and solid
dosages business and Pinewood’s strengths in the liquids and creams business is expected to
complement Wockhardt’s product portfolio going forward. Besides, Wockhardt intends to leverage on
Pinewood’s marketing and distribution network and its customer business in Ireland for its varied range of
hospital products. We expect Pinewood’s revenues to grow at a CAGR off 11% between CY07 and CY10.
The French connection: In May 2007, Wockhardt acquired Negma Laboratories, the fourth largest
pharmaceutical group in France for US$ 265 m giving Wockhardt a foothold in the French generics
market, which has been valued at US$ 2 bn. With this acquisition, Wockhardt extended its presence in
Europe to four countries namely the UK, Germany, Ireland and France. This acquisition is expected to
further strengthen Wockhardt’s presence in the European region and capitalize on the generics potential
in France (the generics penetration in France is low and is expected to increase going forward with
pressure on the government to reduce healthcare costs).
The 'India story': In the domestic market, Wockhardt's competitive edge lies in the biotech space, largely
led by its brands 'Wepox' and 'Wosulin'. 'Wosulin' currently enjoys a market share of over 40% and is the
highest prescribed amongst the new prescriptions. Besides 'Wepox' and 'Wosulin', the company also
plans to launch 'Interferon' and 'Glargine' giving a further impetus to the domestic business. In-licensing
products especially in the dermatology segment is also part of Wockhardt's strategy to keep up the pace
of new product launches. The following table gives an indication of some of the in-licensing deals that the
company has entered into.
Reasons not to buy
High debt equity ratio: Wockhardt has taken a large amount of debt on its books to fund its acquisitions
particularly Pinewood and Negma. As a result, the debt equity ratio jumped to 4.3 in CY08 and this
includes the FCCB of US$ 110 m. The latter especially is due for redemption at the end of the year. Given
the cash crunch that the company is facing due to such high debt levels, it sold off its German operations
(Esparma), the nutritional business in India (with brands Farex and Protinex) and its animal health
business to raise cash. Plans on the anvil also include selling some more non-core assets to raise funds.
The debt equity ratio that the company has is currently way too high as compared to its domestic peers.
Volatile currency movements: Wockhardt is also susceptible to gyrations in the forex market and this
was quite apparent in CY08 when the company had to take on massive forex losses on its books. This
eroded its profitability and pushed the company into losses. While this scenario may not get replicated
anytime soon, the risks of volatile currency movements and its impact on Wockhardt’s financials cannot be
ignored. Given that foreign debt forms a large part of Wockhardt’s already inflated debt, Wockhardt is
more vulnerable as compared to its peers.
Competition lurks: The US and European generics market, where the company is currently present, is
witnessing cutthroat price competition and severe price erosion. Wockhardt is most likely to face the
pricing pressures, especially in the US market, once it starts acquiring scale in this region. Also, UK with
its highly competitive pricing environment continues to be an area for concern.
Rest of the World fails to perform: The Rest of the World (ROW) markets have failed to perform in the
last few years. The company has attributed this to the slow ramp up in the biotech products, exchange
rate issues and the fact that the company is trading cautiously in markets such as Russia. As a result, the
revenue visibility in these markets is hazy from a medium term perspective.
Capex
Since Wockhardt’s debt levels are high we have not assumed any capex for the next three years as
whatever funds the company is able to raise will be used to retire debt.
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