Wockhardt takes a hit on expansion

Wockhardt, the Mumbai-based leading pharmaceutical and biotechnology company that is struggling to repay its nearly Rs 900-crore (Rs 9 billion) debt, is paying the price for its aggressive expansion attempts, including that in the US and Europe, in the last two years, feel industry experts.

Citing the debt as the reason, Fitch on January 30 downgraded its ratings on Wockhardt. The global ratings agency had said that the debt was due to higher short-term loans and foreign currency fluctuations. The downgrade also factored in "liquidity pressures" being faced by Wockhardt due to increased working capital requirements in its US operations and uncertainty over the repayment of its $140 million (about Rs 700 crore) foreign currency convertible bonds obligations due in September.

Sources said Wockhardt's acquisitions, which were costlier, helped the Habil H Khorakiwala-led company to become the largest Indian pharmaceutical player in Europe with over 54 per cent of its revenue from that market. It also helped the company almost double its revenue from Europe. The Rs 2,653-crore (Rs 26.53 billion) drug major earned 64 per cent of its revenues from Europe and the US in 2007.

In October 2006, the company acquired Ireland-based Pinewood Laboratories for $150 million to enter the island nation and leverage Pinewood's marketing network in Europe. Within another five months, the company had acquired Negma Laboratories for $265 million to enter the French market and access its portfolio of 172 patents and distribution network.

In November 2007, the company again paid another $38 million to buy Morton Grove Pharmaceuticals in the US to quickly broaden its portfolio in the American market by adding another 31 products. In the meantime, Wockhardt had acquired or in-licensed more than a dozen brands of products in the last two years, mainly in the lifestyle and dermatology segments, for undisclosed deal terms.

This was as part of the strategy to conquer 2.3 per cent of the domestic market share by the end of 2008, from 1.8 per cent market share in 2006. In 2007, domestic business contributed 29 per cent to the revenues. The company also spent heavily on developing bio-pharmaceuticals and product registrations globally.

However, things did not work well for Wockhardt as anticipated. Wockhardt's market capitalisation eroded to Rs 1,128.33 crore (Rs 11.28 billion) at a share price of Rs 103.10 (as of January 30, 2009) on the Bombay Stock Exchange from Rs 4,544.50 crore (Rs 45.44 billion) at a share price of Rs 415.25 when the Sensex peaked on January 8 last year.

Though Wockhardt planned to divest its research activities to a separate company, it had to drop the plan due to adverse market conditions. Similarly, the group also had to abandon a much-publicised initial public offer to raise about Rs 800 crore (Rs 8 billion) for expanding its hospital network.

Reportedly, the company has put on the block some of its assets such as the acquired facilities in the US and Europe, land in Aurangabad and a few large brands in consumer health care segment.

Recently, it got shareholders' approval to raise another Rs 500 crore (Rs 5 billion) through the issue of redeemable preferential shares for the redemption of FCCBs and for general corporate purpose.

"Even if the company is ready to put its assets partly or fully on the block to repay the debt, it will be difficult to get the expected valuation in this market condition," said Ranjit Kapadia, Research head, PCG, Prabhudas Lilladher, a Mumbai-based brokerage.

"The assets abroad are no longer attractive for most of the overseas players, unless Wockhardt is ready to sell them at less than half the price they paid to buy them," said an investment banker having knowledge of the developments.

Analysts noted that Wockhardt can recover from the current mess as the company can leverage the assets it has made in the US and Europe.

The company's reported profitability in the first nine months of 2008 remained strong and, on a consolidated basis, it posted revenues of Rs 2,600 crore (Rs 26 billion), a 40 per cent growth over the previous year. This was driven by its US operations, which saw revenue growth of 160 per cent over the prior period.

The company's UK operations continued to lead its Europe revenues with a growth of 20 per cent, while domestic operations grew 12 per cent. Operating profits also increased 33 per cent. However, higher interest costs and forex losses on foreign currency loans caused its net profit to fall to Rs 212.10 crore (Rs 2.12 billion) from Rs 277 crore (Rs 2.77 billion) in the prior period. The company is yet to announce the last quarter results for 2008.

Wockhardt's major revenue earners in the future are likely to be from biopharmaceuticals, mainly insulin and insulin analogues such as Glargine and Lispro, which together have a $10 billion opportunity globally.

Wockhardt has an early mover advantage and plans to launch its insulin in the US and Europe by 2010, which together offer an opportunity of a $3,000-million market. Glargine and Lispro will be off-patent only in 2014. The company is also working on a rich pipeline of biopharmaceuticals.

Wockhardt already markets over 60 products in the US and drugs such as generic augmentin, azithromycin, phenytoin, rantidine and hydrocodone are expected to contribute significantly to its revenues. The company has already achieved its target of growing at least 20 per cent in the US in the first three quarters.

However, the company may struggle to reach its immediate revenue target of $1 billion (about Rs 5,000 crore) in 2009, analysts say.