Wockhardt has had a roller coaster ride for the past six to seven years. Tracing its trajectory over the past decade, I remembered that till 2006, it used to be like any other pharmaceutical company, doing well both in terms of earnings and stock performance. However, in the pre-Lehman credit bubble, the company entered into some credit derivatives against its FCCB/ECB loans due to bad financial management and landed in CDR, with the stock slipping below ₹100. CDR in India is a blessing in disguise for most borrowers. Wockhardt’s lenders restructured the debt and lowered the interest rate, which gave some relief. In hindsight, it appears that with the promoter (Habil Khorakiwala) not being actively involved in the company’s daily affairs, plus a few leveraged overseas acquisitions and derivative contracts, the company landed in a big financial mess.
The results were visible the moment the promoter became active. The management got rid of its foreign currency convertible bonds, divested non-core businesses like Protinex and focused on regulated markets such as the US and the EU, all of which helped the company turn itself around. Wockhardt manufactures both generic drugs and formulations. Its research-driven and technology-intensive approach has helped it expand its presence in the US and emerging markets. The company has developed brands in a variety of segments, including anti-infectives, pain and inflammation, cough, psychiatry, medical nutrition and biotech. The company also makes recombinant human insulin.
Its revenue pie of around ₹5,000 crore is largely spread across generics, branded generics, APIs, biotech and biosimilars. In recent years, it has started focusing on new drug discovery, which could offer future growth opportunities.
Wockhardt is expected to satisfactorily resolve USFDA issues at its two facilities, Chikalthana and Waluj, over the next three to six months. This will increase product supplies to the US market, which got affected due to the import alert. It has a strong pipeline of 72 abbreviated new drug applications (ANDAs) pending in the US and has first-to-file (FTF) status for various products. FTF is the status accorded to a drug maker for being the first to have successfully challenged the patent and such a company is granted a six-month period of exclusivity in the US before the market is thrown open for other generics. The US market, which accounts for roughly ₹1,000 crore of annual revenue (20% of total sales) should see significantly higher growth trajectory hereon.
Apart from its focus on generics and branded generics, the company is also focused on biotech research programmes targeted at diabetes and has undertaken such programmes for the development of insulin as well as its analogs (a form of insulin) in the past few years. It has been marketing insulin and insulin glargine, a long-acting insulin analog, in India and other markets and has been successful in gaining acceptance amongst diabetologists and diabetic patients. Insulin products (branded as Wosulin), also available in the form of reusable and disposable pens, are approved in a large number of geographies and are on the rise. All this has enabled it to become one of the select few global pharma companies to launch biosimilar products.
How the cookie crumbles
Wockhardt gets over 40% of its revenue from Europe, 20% from the US, 33% from India and the rest from emerging markets. In India, it has witnessed a strong performance in the domestic business in FY15, with a good deal of visibility for the coming years. The company has several established brands and is launching a number of new products. Five of its brands are in the top 300; it is also ranked 4th in pain management. The strategy is to identify ways to continue the growth momentum through new brand extensions, life-cycle management and other relevant innovations.
In the US, the company is transferring some products to third-party sites till the time its twin units get USFDA clearance. This would help it sell a few of its products but not the blockbuster drug Metoprolol, which was a major revenue contributor in FY13 and FY14. To boost US supplies, the company is ready with a new plant at Shendra, Maharashtra, which is awaiting USFDA approval. The potential upside from its US business can be explained by the fact that the US accounted for 45% of the company’s revenue in FY14, dropping to 24% in FY15 and 20% in the current year. The company has been a trendsetter in the Indian generics industry with its niche drug delivery system products such as Metoprolol ER, Divalproex ER and Tamsulocin ER, which were among the first few generics in the US market. Of the pending ANDAs, about 25% comprise complex generics and modified release formulations. But the US is not its only hope. Of the 40% of revenue supplied by Europe, UK accounts for 90% of sales, while Ireland makes up for the rest. Wockhardt is the largest Indian generics company in the UK and largest pharma company in Ireland and growth here is driven by contract manufacturing. The company plans to drive its south America strategy by leveraging its front-end infrastructure in Mexico. Besides, it intends to leverage insulin, some of the brands from India and some from its US and UK portfolios and distribute those in Africa, Russia and southeast Asia.
In spite of the USFDA restrictions at two of its facilities, the first half of Wockhardt’s current fiscal has been stellar, mainly led by its UK business, which grew by 71% (on a low base, as H1FY15 was hit by regulatory bottlenecks). The UK arm is expected to keep growing strongly even in the second half, as the company has resumed supplies from its Chikalthana plant. While the India business grew at 24% led by the launch of 23 new products, the US business suffered a decline of 11%. In H1FY16, the company got two approvals in the US and filed papers for five products. And although emerging markets account for just 8% of revenue, sales grew by 38%, largely driven by the company’s entry into new markets and the launch of new products.
After the clearance of the Chikalthana and Waluj facilities, supplies to the US are expected to pick up significantly. Given the opportunities from the pending ANDA pipeline and strong growth upside in the US, strong growth in the UK led by contract manufacturing and robust growth in the domestic business led by new launches, the company is poised for strong earnings growth over the next few years. Wockhardt can potentially earn an EPS of ₹77 for FY17, assuming profits of ₹850 crore.
At 20x estimated FY17 earnings, the stock is relatively cheaper compared with counterparts such as Ajanta Pharma (25x) and Alembic (25x), which have much smaller revenue bases but still trade at higher multiples. Given that the earnings potential from the US market is not being currently priced in by the Street, the stock can supply 30-40% upside in 2016.
The writer and his clients hold a position in the stock