India

Research

Initiating Coverage Pharmaceutical

Wockhardt Ltd.

Wockhardt : “Wock”ing the talk...

Head of Institutional Equities &

Derivatives: Sanju Verma
sanju.verma@hdfcsec.com
91-22-6661 1859

Amit Shah
amit.shah@hdfcsec.com
91-22-6661 1828 August 03, 2007

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
 HDFC Securities Wockhardt Ltd.

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

August 03, 2007 Page 2

HDFC Securities Wockhardt Ltd.

BUY 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.
CMP Rs. 373 It is one of the very few companies in India to have built a strong product pipeline in
Target Rs. 570 biotechnology products. Today, Wockhardt has developed comprehensive capabilities in all
Stock Return 54.1% facets of recombinant biotechnology, including gene cloning and development of production
Capital Appreciation 52.8%
strains. The company is also introducing biotechnology products in the (Rest of the World)
Dividend Yield 1.3%
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
Nifty 4356
ramped up its US business by introducing a number of generic products there. Last year, its
Sensex 14986
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.

Key Stock Data 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
Sector Pharmaceutical
Reuters Code WCKH.BO offered by CRAMS (Contract Research And Manufacturing). It has signed a deal with Amylin
BLOOMBERG Code WPL IN for contract manufacturing. Its domestic formulation business is also doing very well. The
No. of Shares (mn) 109.44 company is focusing on strengthening its presence in diabetology, nephrology (related to
Market Cap (Rs bn) 40.82 kidneys) and nutrition segments.
Market Cap ($ mn) 1020
Avg. 6m Vol.(mn) 120816
Outlook and Valuation
Stock Performance (%) We feel the company’s aggressive acquisitions in Europe will pay off in the future through
52 - Week high / low Rs.450 /324 various synergies. Also, its US business will contribute increasingly to growth. We believe, it
1M 3M 6M is very well placed to take advantage by introducing biotechnology products in regulated
Absolute (%) -1.93 -9.86 10.33 markets, once the regulations are in place. The company hopes to achieve $1bn in revenues
Relative (%) -7.98 -21.96 -0.03 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
Shareholding Pattern (%) trades at a forward PE of 10.6x and 8.5x respectively. Considering its capabilities and
Indian Promoters 73.64
strong business prospects, we feel the stock is trading at a steep discount to its peers.
FIs & Local MFs 10.42
Hence we recommend BUY, with a price target of Rs. 570. Our price target is based on a
FIIs 5.08
Free Float 10.86
PE of 13x on the CY08 expected EPS of Rs. 43.9.
Source : Company 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
Sensex and Stock Movement
Net Profit 2,135.00 2,571.00 2,413.00 3,839.82 5,259.86
Close Price BSE_SENSEX % Ch. YoY 20.42 (6.15) 59.13 36.98
450 17500
EPS 19.59 23.52 22.05 35.09 43.90
400 15000
% Ch. YoY 20.09 (6.26) 59.13 25.13
350 12500
300 10000 PER(x) 15.18 18.85 19.96 10.63 8.50
250 7500 EV/EBIDTA(x) 12.08 15.34 14.52 8.78 6.37
M-07

Book Value (Rs.) 56.57 74.67 97.43 127.52 195.46

D-06
J-06

O-06

J-07

J-07
J-07
S-06

A-07

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

August 03, 2007 Page 3

HDFC Securities Wockhardt Ltd.

Swot Analysis -

Strengths
• Strong expertise in the area of Recombinant Biotechnology (3 products launched)
S • Strong presence in the European market (50%+ revenue comes from Europe)

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

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

O
Weaknesses
• Nascent presence in the US market (Less than 10% contribution to total revenues)
T • Highly leveraged balance sheet with D/E ratio more than 1.5x

A
Opportunities
N • Leverage on synergies present in the European market

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

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

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

Y 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)

S • 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
I • Any expensive acquisitions may increase payback period

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

S 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)

August 03, 2007 Page 4

HDFC Securities Wockhardt Ltd.

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

August 03, 2007 Page 5

HDFC Securities Wockhardt Ltd.

Peer Comparison

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
Source : Industry, HDFC Sec Research

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
Source : Industry, HDFC Sec Research

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.

August 03, 2007 Page 6

 HDFC Securities Wockhardt Ltd.

Valuations
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
The company is trading at an
attractive forward PE of 11.3x and 9x At the current price of Rs. 373, the stock is trading at PE ratio of 12.4x and EV/EBIDTA of 10x
on CY07 and CY08 basis 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.

1 yr Fwd PE
1000
900 25x
800
700 20x
600
15x
500
400 10x
300
200
100
0

Jul-06
Mar-04

Feb-05

Mar-06

Mar-07
May-06
Jan-04

Jun-04

Jun-05

Jan-06

Jan-07
Dec-04

Sep-05
Nov-05

Sep-06
Nov-06
Oct-04
Aug-04

Aug-05
Apr-04

Apr-05

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

August 03, 2007 Page 7

HDFC Securities Wockhardt Ltd.

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
Wockhardt is the largest acquisitions in the domestic and international markets in the last decade. Currently, about
pharmaceutical company present 65% of the revenues come from international markets (54% Europe, 7% US). It specializes
in Europe 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
Over the years the company has R&D center of whom more than 150 are PhDs. Its research encompasses process
developed strong expertise in engineering for APIs (bulk drugs), new chemical entities, novel drug delivery systems [NDDS]
biotech and research 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.

Business Model

Wockhardt

Formulation R&D ROW

US Europe India ROW Domestic International

NCE Generic Biologics

Source : Company

August 03, 2007 Page 8

 HDFC Securities Wockhardt Ltd.

Acquisition History of Wockhardt

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

Acquired Company Year Country Deal Size EV/Sales Purpose

Wallis Laboratory 1998 UK $8mn Strategic entry into European market
Merind 1998 India NA NA For expansion of therapeutic coverage
CP Pharmaceuticals 2003 UK $18mn 0.3x Establish significant presence in UK
Esparma GmbH 2004 Germany $11mn 0.6x Strengthning presence in European market
Dumex India 2006 India NA NA Acquiring nutrition brands
Pinewood Laboratory 2006 Ireland $150mn 2.1x Entering branded generic market of Ireland
Negma 2007 France $265mn 1.8x Entering fast growing generic market of France
Source : Company, HDFC Sec Research

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.

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 cross
introduction of its products. Pinewood is making
operating margins in excess of 20%
Dumex India 800 1000 3.10% 3.00% When acquired it was loss making company. Wockhardt
managed to breakeven within 6 months and sales is
growing 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%

Source : HDFC Sec Research

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.

August 03, 2007 Page 9

HDFC Securities Wockhardt Ltd.

CY05 CY06

API USA API USA

12% 7% 10% 6%

India India
36% 38%
Europe Europe
ROW 39% ROW 40%
6% 6%

CY07E CY08E
API USA API USA
7% 7% 6% 8%
India
India
24%
28%

ROW
ROW Europe 4%
Europe
4% 54%
58%
Source : Company, 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 is ramping up its US
business and has received a record
number of ANDA approvals in the
last five months
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.

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HDFC Securities Wockhardt Ltd.

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%
Source : Company, HDFC Sec Research

US Product Status
80
70
60
50
40
30
20
10
0
CY2005 CY2006 CY2007(E)
ANDA Pipeline Product Approvals
Source : Company, HDFC Sec Research

SWOT analysis for the US business

Strengths Weaknesses
• Strong ANDA pipeline (More than 30 ANDAs awaiting • Late effective entry into the already saturated US generic
approval) market (in 2004)

• Strong expertise in the injectibles segment (6 injectibles

approved)

Opportunities Threats
• Low penetration till date (Less than 10% revenue comes • Severe pricing pressure could erode margins (price
from the US market) erosion more than 95%)

• Huge scope for bio-generic market going forward (market • Regulatory issues may delay approvals
size pegged at $10bn)

August 03, 2007 Page 11

HDFC Securities
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
August 03, 2007
Wockhardt Ltd.
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
Source : Industry, HDFC Sec Research
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.
Page 12
HDFC Securities Wockhardt Ltd.

Pinewood Acquisition – Strategic fit

Wockhardt acquired Pinewood Laboratories in 2006 and established its presence in Ireland.
Pinewood acquisition gave
Pinewood is the fastest growing and also the largest branded generic company in Ireland.
Wockhardt a strong foothold in
The deal size was $150mn, valued at two times its sales and 10 times the EBIDTA. For the
branded generic market
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
Negma enabled Wockhardt to
EV/Sales valuation of 1.6x. The valuation was reasonable. Negma is the fourth largest
enter low genericised French
integrated pharmaceutical company in France with its own patented products and
market
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.

Strengths Weaknesses
• One of the largest players in France (4th largest) • R&D pipeline for new molecules is weak. (No major
molecule in advanced stages)
• Portfolio of strong branded drugs (Diacerein & Nebivolol)

Opportunities Threats
• Diacerein and Nebivolol can be introduced in other • Low genericisation of French market will cause problems
European markets in launching new drugs

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

operations

European Business Growth

20,000
18,000
16,000
14,000
12,000
(Rs. Mn)

10,000
8,000
6,000
4,000
2,000
0
2005 2006 2007(E) 2008(E)

Source : Company, HDFC Sec Research

August 03, 2007 Page 13

HDFC Securities Wockhardt Ltd.

SWOT analysis for European business

Strengths Weaknesses
• Presence in the largest generic markets in Europe (UK, • The company cannot attain full manufacturing synergies
Germany, France, Ireland) due to various regulations

• Largest Indian pharmaceutical company in Europe

(Revenue expected for CY07 is Rs.13.87bn)

Opportunities Threats
• Bio-generic market can give huge opportunity going forward • Regulatory aspects in various European markets can hurt
(Size pegged at about $10bn) growth prospects

• Low genericisation in various markets like France gives • Increasing competition in European market (Top 5 Indian
huge opportunities (7% generic penetration) companies are already present in Europe)

• The company can benefit from huge marketing and

manufacturing synergies

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

One of the largest players in
domestic markets
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
Dumex has strengthened
the largest selling infant nutrition foods. These two brands contribute over Rs. 600mn in
Wockhardt’s nutrition business
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.

August 03, 2007 Page 14

HDFC Securities Wockhardt Ltd.

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.

Domestic Therapeutic break up

Others CVS Diebetology

10% 3% 8%
Respiratory
12% Neutraceuticals
22%
Dermatology
5%

Anti-infectives CNS
13% 7%
Pain Nephrology
18% 2%

Source : Company

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.

Indian Formulation Growth (%)

30

25

Wockhardt has consistantly beaten 20

average domestic market growth
15

10

0
CY04 CY05 CY06
Industry Grow th Wockhardt Grow th

Source : Industry, HDFC Sec Research

August 03, 2007 Page 15

HDFC Securities
Wockhardt has already introduced
3 biotech products in the domestic
market
The company has developed
expertise in NCE and biotech
research
August 03, 2007
Wockhardt Ltd.
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.
Research Focus
Biotech
New Research &
Chemical Development Generics
Entity
Page 16
HDFC Securities Wockhardt Ltd.

Research Pipeline Details

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

Source : Company

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.

August 03, 2007 Page 17

 HDFC Securities Wockhardt Ltd.

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 Operating Profit

35,000 9,000
30,000 8,000
4% 7,000
25,000 R2
CAG 6,000 R2
9%
(Rs. Mn)

CAG
(Rs. Mn)

20,000 5,000
15,000 4,000
3,000
10,000
2,000
5,000
1,000
0 0
CY04 CY05 CY06 CY07(E) CY08(E) CY04 CY05 CY06 CY07(E) CY08(E)

Net Profit
6,000

5,000
5%
4,000 R2
CAG
(Rs. Mn)

3,000

2,000

1,000

0
CY04 CY05 CY06 CY07(E) CY08(E)

Source : Company, HDFC Sec Research

August 03, 2007 Page 18

HDFC Securities Wockhardt Ltd.

Financials
Balance Sheet (Rs. Mn)
Financial Year CY04 CY05 CY06 CY07(E) CY08(E)
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

Income Statement (Rs. Mn)

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

August 03, 2007 Page 19

HDFC Securities Wockhardt Ltd.

Cash Flow - Consolidated (Rs. Mn)

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

August 03, 2007 Page 20

 HDFC Securities Wockhardt Ltd.

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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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August 03, 2007 Page 21