Wockhardt Initiating Coveragebreport.myiris.com/ESSBL/WOCKHARD_20121102.pdf · Wockhardt’s US business, which currently constitutes40% of revenues,is likely to grow at 21% CAGR

©

Your success is our success

Emkay

Init

iati

ng

Co

vera

ge

Emkay Global Financial Services Ltd. 1

Financial Snapshot (Consolidated) Rs mn

YE- Net EBITDA EPS EPS RoE EV/

Mar Sales (Core) (%) APAT (Rs) % chg (%) P/E EBITDA P/BV

FY11A 37,512 9,170 24.4 5,717 52.3 0.0 66.3 28.7 21.6 17.4

FY12A 46,091 14,351 31.1 6,824 62.4 19.4 73.5 24.0 13.2 11.2

FY13E 56,256 16,685 29.7 11,161 102.0 63.6 52.7 14.7 11.0 6.3

FY14E 64,989 19,506 30.0 13,127 120.0 17.6 40.4 12.5 9.0 4.2

Wockhardt LimitedStill scope for re-rating – Initiate with Buy

November 2, 2012

Rating

Buy

CMP Rs1,503

Target Price Rs2,160

EPS Chg FY13E/FY14E (%) NA

Target Price change (%) NA

Nifty 5,645

Sensex 18,562

Price Performance (%) 1M 3M 6M 12M

Absolute 16 50 106 246

Rel. to Nifty 18 39 92 225

Source: Bloomberg

Relative price chart

250

515

780

1045

1310

1575

Nov-11 Jan-12 Mar-12 May-12 Jul-12 Aug-12 Oct-12

Rs

-40

16

72

128

184

240%

Wockhardt (LHS) Rel to Nifty (RHS) Source: Bloomberg

Stock Details Sector Pharmaceuticals

Bloomberg WPL IB

Equity Capital (Rs mn) 547

Face Value(Rs) 5

No of shares o/s (mn) 109

52 Week H/L 1,585/ 251

Market Cap (Rs bn/USD mn) 165/ 3,062

Daily Avg Volume (No of sh) 387,821

Daily Avg Turnover (US$mn) 8.6

Shareholding Pattern (%) Sep12 Jun12 Mar12

Promoters 73.6 73.6 73.6

FII/NRI 7.1 5.3 3.4

Institutions 14.1 3.7 4.2

Private Corp 2.4 3.0 3.3

Public 2.8 14.3 15.6 Source: Bloomberg

Deepak Malik [email protected] +91-22-66121257 Ashish Thavkar [email protected] +91-22-66121254

n US business, key to the company’s turnaround, to grow by 21% CAGR over FY12-14E led by niche launches like Flonase, Comtan, Stalevo & 20 other new products

n Expect domestic business to grow by 12% CAGR over FY12-14E, led by its focus on Vitamins, Respiratory, Diabetes and Pain therapy

n Debt concerns plaguing the stock in the past, to cease in the next one year on the back of strong operating cash flows and sale of nutrition business

n Going forward – 31% CAGR in earnings & reduction in net debt to zero will re-rate the stock from current 15x FY13E to 18x FY14E EPS of Rs120. Initiate coverage with a BUY and TP of Rs 2,160 which is 45% upside from CMP of Rs1,503

US Generic – the key growth driver

Wockhardt’s US business, which currently constitutes 40% of revenues, is likely to grow at 21% CAGR over FY12-14E led by niche launches like Toprol, Flonase, Comtan and Stalevo, which are either difficult to manufacture or are multi-year opportunities with high entry barriers. In H1FY13, the company launched 9 products and is expected to launch 6-9 more products in H2FY13, which will propel the growth in FY13 and FY14. Company has stepped up new fillings in US and plans to file 12-15 products every year.

Domestic business – Steady growth

We expect Wockhardt’s domestic business (25% contribution) to grow by 12% CAGR over FY12-14E, led by its focus on Vitamins, Respiratory, Diabetes and Pain therapies, which contribute 55% of the domestic portfolio. Post the divestment of its Rs2.5bn nutrition business to Danone, brands retained by Wockhardt in Nutrients & Vitamins segment still have the ability to deliver good growth in coming years.

Balance sheet – Continuously improving visibility

Wockhardt has settled all its liabilities related to currency derivatives last year. Debt, which has been a major overhang on the stock, is likely to reduce to nil by FY14E on the back of strong cash flows from the business and sale of its nutrition business. Company has Rs19bn of cash on the balance sheet after receiving Rs12.8bn of cash from Nutrition business sale. This cash will be primarily used in reduction of Rs32bn of debt out of which Rs11.5bn of debt is under the CDR Scheme.

Still scope for re-rating; Initiate with a Buy and target price of Rs 2,160

Wockhardt has one of the largest and the most profitable US businesses with steady India business. It has one of the best in class operating and balance sheet ratios. Going forward – 31% CAGR in earnings & reduction in net debt to zero will re-rate the stock from current 15x FY13E to 18x FY14E EPS of Rs120. Initiate coverage with a BUY and TP of Rs 2,160 which is 45% upside from CMP of Rs1,503. At CMP, the stock trades at 15x FY13E and 13x FY14E EPS.

Wockhardt Limited Initiating Coverage

Emkay Research November 2, 2012 2

Investment Synopsis Wockhardt’s strategy of - 1) identifying niche formulations in the US and strengthening its presence in those segments, 2) ensuring that the domestic business grows in line with the industry and 3) constant restructuring efforts through divestments - has paid off handsomely. Wockhardt has successfully turned around its operations in FY11 on the back its two pronged focus on strengthening its business as well as balance sheet.

Going forward, we expect Wockhardt to reduce its debt to nil on the back of strong cash generation from its core business and sales proceeds from neutraceutical business divestment, thereby putting to rest leverage concerns.

With these positive developments, we believe a re-rating is imminent. While the stock has witnessed some re-rating, we believe there is still more scope for re-rating.

We initiate the coverage on the stock with a BUY rating and a target price of Rs2160, valuing the company at 18x FY14E EPS of Rs120.

US Business – A key growth driver

Wockhardt has a very robust US business with USD490 mn revenue expected in FY13. US business contributes almost 40% to its revenue and is expected to grow by 21% CAGR during FY12-14E. Company is currently selling 60 products and 88 ANDAs in the US market. Toprol XL is the largest product in the market with USD140 mn or 30% of the revenue for FY13 followed by Bromfed, Amoxyclav, Azithromycin and Tamsulosin contributing ~5% each to the US revenue. Top 5 products contribute 50% of the US revenue.

Going forward, we expect its US business to grow by 21% CAGR over FY12-14E, led by niche launches. In H1FY13 company launched 9 products and is expected to launch 6-9 more products in H2FY13, which will propel growth in FY13 and FY14.

Exhibit 1: US revenues set to grow at 21% CAGR over FY12-14E

144 211 375 490 5530

100

200

300

400

500

600

FY 10 FY 11 FY 12 FY 13 E FY 14 E

US Revenues, $ mn

FY12-14E Revenue CAGR 21%

Source: Company, Emkay Research

Toprol XL –Wockhardt’s jewel in the crown

Wockhardt got USFDA approval to market generic Toprol in US in July 2010. Wockhardt generated US$58mn in revenues in FY11 and US$140mn in FY12. Since Toprol XL is highly soluble in nature, formulating a stable extended release formulation is a difficult task. Hence, Toprol continues to remain immune to higher competition unlike plain vanilla generics. Mylan entered the market in Dec’11 followed by Dr. Reddys in Sept’12. Going ahead, we expect other players like Sandoz (likely to get approval by FY13 end), Cadila and Intas Pharma to enter the market.

We do not expect a major decline in Toprol revenues as AstraZeneca, Watson and Mylan have priced their products at 30-40% premium to Wockhardt. Any new player entering the market would therefore take majority of market share from AstraZeneca and Watson or from Par Pharma, which has the highest market share at 33%.

US business is expected to grow by 21% CAGR over FY12-14E led by niche launches

Going forward, we do not expect a major decline in Toprol revenues as AstraZeneca, Watson and Mylan have priced their products at 30-40% premium to Wockhardt



Exhibit 2: Generic Toprol XL Market share dynamics

US$ mn 2012 Assumed for 2013 Assumed for 2014

Toprol XL Mkt Share Revenues Mkt Share Revenues Mkt Share Revenues

Par (AG) 37% 251 33% 209 29% 173

Watson 25% 169 25% 158 22% 132

Wockhardt 21% 140 19% 120 18% 108

Mylan 8% 52 11% 70 12% 72

AstraZeneca 8% 50 6% 38 5% 30

Dr. Reddys 1% 8 6% 38 8% 48

Sandoz/Cadila/Intas - - - - 6% 36

Total 100.0% 670 100.0% 633 100.0% 598

% Vol. Gr. 5% 5%

% Price inc/(dec) -10% -10%


India business – Growth picking up

Wockhardt’s domestic formulation business recorded a growth of 13% during FY12 and 13% CAGR over FY07-12, led by strong focus on Vitamins, Respiratory, Pain & Diabetes franchisee, which contributes 55% to the domestic portfolio. With a strong sales force of 3,300 covering 4 lakh medical practitioners, it has 7 brands featuring in the top 300 rankings in the industry.

Exhibit 3: India revenues to grow at 12% CAGR over FY12-14E

9692 9260 10410 11720 13126 14833

20%13%12%12% 13%

-4%

0

3000

6000

9000

12000

15000

18000

CY08 FY10 FY11 FY12 FY13e FY14e-15%

-5%

5%

15%

25%

India Revenues, Rs mn YoY Gr.

India: 13% Revenue CAGR vs. IPM avg. gr. of 14%


Going ahead, we expect increasing thrust on sales with focus on lucrative segments to aid stronger margins and higher profitability. Strong focus on Anti-diabetes and the Nutrition franchisee would aid revenue growth. However, we conservatively project domestic formulation business growth at 12% CAGR over FY12-14E

Wockhardt has a strong focus on Anti-diabetes and the Nutrition in the domestic business



Financial Summary

Exhibit 4: Financial Snapshot

FY10 FY11 FY12 Particulars, Rs mn FY13E FY14E

144 211 375 US ($ mn) 490 553

144 211 235 Base Business 355 436

0 0 140 Toprol XL 135 117

348 280 244 Europe ($ mn) 264 290

182 205 231 India ($ mn) 252 280

42 42 57 RoW ($ mn) 77 104

716 738 908 Total Sales (US$ mn) 1083 1228

36390 37510 46140 Total Sales (Rs mn) 56316 65058

3% 23% % YoY Growth 22% 16%

6644 Toprol XL 7025 6209

39496 Base Business 49291 58849

% YoY Growth - Base business 24.8% 19%

7276 8332 12672 EBITDA (entire R&D expensed) 16685 19506

16.2% 22.2% 27.5% EBITDA % 29.7% 30.0%

8231 9170 14400 EBITDA (R&D Capitalization) 19104 22301

18.3% 24.4% 31.2% EBITDA % 34.0% 34.3%

EPS

-21 45 70 - Entire R&D expensed 102 120

-12 52 62 - R&D Capitalized 124 146

PE

-72 34 21 - Entire R&D expensed 15 13

-124 29 24 - R&D Capitalized 12 10 Source: Company, Emkay Research

Have accounted for R&D expenses in P/L to facilitate peer comparison

Wockhardt capitalizes significant portion of its R&D expenses, which led to an increase in Capital work in progress for the company. Wockhardt invests 5-6% of the sales in R&D whereas only 2-3% of it gets expensed through P&L. In contrast, other big pharma companies expense it out through P&L only. For comparison purpose we have expensed the entire R&D expenditure through P&L for Wockhardt.

Exhibit 5: Wockhardt capitalizes R&D which reflects in Balance Sheet as CWIP Rs mn FY10 FY11 FY12 FY13E FY14E

R&D, expensed 668 483 753 3,427 3,745

% to Sales 1.5% 1.3% 1.6% 6.0% 6.0%

R&D, capitalized 955 838 1728 0 0

% to Sales 2.1% 2.2% 3.7% - -

Total R&D 1,623 1,321 2,480 3,427 3,745

% to Sales 3.6% 3.5% 5.4% 6.0% 6.0%

CWIP 7076 8874 9023 - -


Wockhardt invests 5-6% of the sales in R&D whereas only 2-3% of it gets expensed through P&L



Wockhardt trades at a hefty 30% discount to peers Wockhardt has one of the largest and the most profitable US operations with steady India business. It has one of the best in class operating and balance sheet ratios. In spite of this it is trading at a hefty 30% discount to its peers on one year forward earnings. Hence we believe, Wockhardt will likely see the expansion in valuation multiple from current average of 15x FY13E to 18x FY13E which will be on account of reducing debt led by strong operating cash flows.

We initiate the coverage on the stock with a BUY rating and a target price of Rs2160, valuing the company at 18x FY14E EPS of Rs120

Exhibit 6: Valuation Comparables Reco Mcap PAT

(Rs bn) (Rs bn) EPS PE(x) EV/ EBITDA (x) ROCE (%) ROE (%) P/BV (x) FY13e FY12 FY13e FY14e FY12 FY13e FY14e FY13e FY14e FY13e FY14e FY13e FY14e FY13e FY14e

Cadila Buy 176 8.3 35 40 47 24 21 18 15 13 23 24 30 28 6 5

Cipla Hold 292 12.1 13 17 19 27 21 19 14 12 19 20 15 15 3 3

Dr. Reddy's Hold 298 16.5 90 97 100 19 18 18 14 12 24 23 28 26 5 4

Lupin Buy 253 11.6 21 26 32 27 22 18 18 14 25 30 26 26 6 5

Ranbaxy Buy 222 8.9 18 21 27 30 25 19 7 11 35 16 19 19 4 3

Sun Pharma Buy 714 28.8 25 28 32 28 25 22 19 17 25 24 23 21 5 4

Wockhardt Buy 164 11.2 70 102 120 21 15 13 11 9 32 35 53 40 6 4

Large Caps 302.7 13.9 39.0 47.4 53.8 25.2 21.0 18.1 13.9 12.5 26.4 24.5 27.5 25.0 5.1 4.0

Glenmark Buy 115 5.4 19 20 25 23 21 17 14 12 16 17 20 21 4 3

Torrent Buy 57 3.8 36 45 53 19 15 13 9 8 28 29 30 31 4 4

Unichem Hold 17 1.1 8 13 16 24 15 12 15 10 14 19 11 17 3 2

IPCA Buy 57 4.1 26 33 38 18 14 12 10 9 26 25 28 25 4 3

Pfizer Reduce 39 2.0 62 65 74 18 17 15 15 13 14 14 14 14 3 2

Glaxo Reduce 169 7.0 74 83 95 27 24 21 13 11 51 51 34 34 8 7

MidCaps 75.9 3.9 37.4 43.2 50.2 21.4 17.8 15.0 12.8 10.5 24.8 25.9 23.0 23.7 4.1 3.5

Total 378.7 17.8 38.2 45.3 52.0 23.3 19.4 16.6 13.3 11.5 25.6 25.2 25.3 24.3 4.6 3.7


For valuing Wockhardt we have made following assumptions –

§ We have expensed all the R&D expenditure i.e. Rs3.42bn, while calculating the EPS of Rs102 for F13E and Rs120 for FY14E

§ We have valued Wockhardt at 18x FY14 earnings i.e. 10% discount to large cap pharma peers.

From the entire Pharma pack highlighted in the table above, companies which are generating profit of more than Rs10bn are – Sun Pharma, Cipla, Dr. Reddy’s, Lupin and Wockhardt. Wockhardt is a new entrant to the Rs10bn club. In spite of this, the market capitalization for all the front line companies is at ~70% premium to Wockhardt. Given its foray into the Rs10bn club, reduction in debt and strong performance over the next 2 years, we believe such an anomaly is unjustified and expect the valuation gap to narrow down, going ahead.

Risk to our call

§ Higher than expected competition in Toprol XL

§ Delay in launch of niche opportunities

§ Failure to ramp-up the filings in US



Investment Rationale

Undeterred by past failures, Wockhardt has successfully turned around its operations

Wockhardt has steadily worked against all odds (challenging business environment, balance sheet woes, and adverse currency movements) and emerged with a strong US business, steady domestic business and an improving balance sheet.

During 2006-07, Wockhardt raised debt to finance the acquisitions of 1) Pine wood, Ireland – USD 150mn in 2006, 2) Negma France for USD 265 mn in 2007 and 3) Morton Grove in US for USD 38mn in 2007. Things went into rough weather when adverse pricing environment in Europe, generic competition for key patented product “Diacerien happened immediately after acquisition. To make things more challenging in 2008-09, currency played havoc and losses on derivative contracts worth of Rs. 17.4bn eroded its Net-worth. Total debt on the balance sheet reached Rs. 34 bn, which included USD 250 mn of foreign currency loans and USD 100 n of FCCB.

Today, the company has settled all the liabilities related to derivatives contracts. Net debt has come down to Rs13bn on the back of strong operating cash flows and sale of Nutrition business. Net Debt will become zero in FY14 on back of very strong cash flows in FY13 (Rs. 5.9bn) and FY14 (Rs. 8bn).

Exhibit 1: Revenues & Margins Trend

17 27 36 45 38 46 56 65

23% 24%22%

18%

24%27% 30% 30%

0

20

40

60

80

CY06 CY07 CY08 FY10 FY11 FY12 FY13E FY14E0%

8%

16%

24%

32%

Revenues, Rs billion EBITDA margins


Exhibit 2: Wockhardt turns FCF positive with turnaround of operations

-8793

-14954

-7170-8249

58934685

2885

CY06 CY07 CY08 FY10 FY11 FY12 FY13E FY14E

Wockhardt turns FCF +ve due to strong

growth in US led by Toprol XL


The company’s fortunes changed when it hit the jackpot in the form of Toprol XL. Wockhardt launched Toprol XL in US in July 2010 at a time when there were 3 players already in market – AstraZeneca, Par Pharma (AG) and Watson Labs. For FY12, this product contributed US$140mn in revenues and 18% of the company’s gross profit. This blockbuster launch was followed by few more niche launches like Flonase (Jan’12), Stalevo ( Apr’12) and Fexofinadine OTC (Apr’12) in the last 6 months.

Net Debt will become zero over the next two years on back of very strong cash flows in FY13 (Rs. 5.9bn) and FY14 (Rs.8bn)

8035



US Business – Cash Cow for other businesses Wockhardt has a very robust US business with USD490 mn revenue expected in FY13. US business contributes almost 50% of its revenue and is expected to grow by 21% CAGR in FY12-14. Currently the Company has 60 products or 88 ANDAs launched in the market. Toprol XL is the largest product in the market with USD140 mn or 30% of the revenue for FY13 followed by Bromfed, Amoxyclav, Azithromycin and Tamsulosin contributing ~5% each to the US revenue. Top 5 products contribute 50% of the US revenue.

Going forward, we expect its US business to grow by 21% CAGR over FY12-14 led by niche launches. In H1FY13, company launched 9 products and is expected to launch 6-9 more products in H2FY13, which will propel the growth in FY13 and FY14.

Exhibit 3: US revenues set to grow at 21% revenue CAGR over FY12-14E

144 211 375 490 5530

100

200

300

400

500

600

FY 10 FY 11 FY 12 FY 13 E FY 14 E

US Revenues, $ mn

FY12-14E Revenue CAGR 21%


ANDA Pipeline

Wockhardt launched 6 ANDAs in FY12 and 9 ANDAs in H1 FY13. As of now, the company has 87 ANDAs launched in the US out of which, two are OTCs i.e. Lansoprozole and Fexofinadine.

The company had filed 13 ANDAs in FY12 and 4 in Q1FY13 taking the cumulative ANDA filings to 119. Currently, 32 ANDAs are pending for approval with US FDA, of which 10 are First-to-File (FTF) signifying higher quality of product filings.

Exhibit 4: Wockhardt has quality ANDA filings with FTF/ Para-IV’s on 10 molecules

32

87

119

10

0

20

40

60

80

100

120

140

Pending Launched Total Filings FTF with Para-IV


Going forward, US business is expected to grow by 21% CAGR over FY12-14 led by niche launches.

Company has 32 ANDAs pending US FDA approval, of which, 10 are First-to-File (FTF) signifying higher quality of product filings



US Revenue breakup for FY12

Exhibit 5: Toprol was the highest contributor at 37% of US revenues

Toprol XL37%

Bromfed9%

AmoxyClav5%

Azithromycin5%

Tamsulosin4%

Flonase1%

Others39%


US product pipeline

Niche product pipeline to improve profitability

Wockhardt currently has niche products in its portfolio such as Toprol XL, Flonase and Stalevo. Comtan is expected to get launched shortly in US market. Company is very strong in the Injectable space along with Sun Pharma and Strides. Going ahead, we expect limited competition products to improve earnings trajectory. Following is the list of some of the key launches in US by Wockhardt.

Exhibit 6: US Product Pipeline Revenues ($ mn) EPS (Rs mn)

Brand Generic Name Branded Sales Expected Launch FY13E FY14E FY13E FY14E

Competition

Toprol XL Metropolol Succinate 1130 Launched 135 117 33.7 29.8 5+

Flonase Fluticasone Proportionate 580 Launched 30 35 8.9 9.5 4+

Stalevo Levodopa, Carbidopa, Entacapone 55 Launched 12 12 3.4 3.2 1

Comtan Entacapone 98 Shortly 10 21 3.0 5.6 1

Tricor Fenofibrate 1000 Jan'13 5 15 0.9 2.6 4+

Actos Pioglitazone 3100 Feb'13 2 5 0.4 0.9 10+

Cymbalta Duloxetine 3172 Jun'13 0 12 0.0 2.0 8+

Lunesta Eszopiclone 787 Nov'13 0 8 0.0 1.3 12+

Cambia Diclofenac Potassium 50 2HFY13 3 5 0.5 0.9 2+

Total 9972 197 229 50.6 59.0




Toprol XL – Key catalyst for earnings growth in the medium term

Toprol XL (Metoprolol Succinate) is a brand owned by AstraZeneca. Prior to generisation, brand Toprol generated US1.1bn in sales for the innovator. When Wockhardt got USFDA approval to market generic Toprol in US in July 2010, Par was already selling the product as Authorized Generic (AG) along with Watson as a generic player. Wockhardt generated US$58mn in revenues in FY11 and US$140mn in FY12. Since Toprol XL is highly soluble in nature, formulating a stable extended release formulation is a difficult task – hence Toprol continues to remain immune to higher competition unlike plain vanilla generics. Mylan entered the market in Dec’11 followed by Dr. Reddys in Sept’12. Going ahead, we expect other players like Sandoz (likely to get approval by FY13 end), Cadila and Intas Pharma to enter the market.

Exhibit 7: Generic Toprol XL Market Share Dynamics US$ mn 2012 Assumed for 2013 Assumed for 2014

Toprol XL Mkt Share Rev's Mkt Share Rev's Mkt Share Rev's

Par (AG) 37% 251 33% 209 29% 173

Watson 25% 169 25% 158 22% 132

Wockhardt 21% 140 19% 120 18% 108

Mylan 8% 52 11% 70 12% 72

AstraZeneca 8% 50 6% 38 5% 30

Dr. Reddys 1% 8 6% 38 8% 48

Sandoz/Cadila/Intas - - - - 6% 36

Total 100.0% 670 100.0% 633 100.0% 598

% Vol. Gr. 5% 5%

% Price inc/(dec) -10% -10%


Exhibit 8: Pricing of 100mg Toprol XL by AstraZeneca & generics Company Pricing

AstraZeneca $175

Par (AG) $90

Watson $140

Mylan $130

Dr. Reddy $120

Wockhardt $100


AstraZeneca trying to shift prescriptions to DUTOPROL

Although entry of generics has not led to higher price erosion (~40-50% only), it has caused a huge dent in AstraZeneca’s market share for Toprol XL. Hence, in order to arrest the loss of revenues from Toprol XL, AstraZeneca has launched DUTOPROL (metoprolol succinate extended release/hydrochlorothiazide) which contains the API of Toprol XL along with a low-dose diuretic and is priced competitively against the generics of Toprol XL. Dutoprol is available in 25/ 50/ 100mg strengths.

Toprol continues to remain immune to higher competition since formulating a stable extended release formulation is a difficult task

AstraZeneca has launched Dutoprol, which is priced competitively against generics of Toprol XL



Flonase – To remain a low competition opportunity

Flonase (Fluticasone Spray) is a brand owned by GSK Pharma.

Therapeutic Use: Flonase nasal spray is used to treat nasal symptoms such as congestion, sneezing, and runny nose caused by seasonal or year-round allergies. Flonase is used for adults and children above 2 years.

Wockhardt received approval for the generic version of Flonase in Jan’12. Despite being generic for more than 7 years, Wockhardt was only the 4th generic player to get USFDA approval for the product. The reason for lower competition in Flonase is that it is difficult to genericize as it has a drug plus device component i.e. pump.

In nasal spray suspensions, in addition to bioequivalence studies, additional clinical studies are required to be conducted by the generic company to support its approval process, which are expensive, thereby limiting competition. One of the other important reasons for limited competition is a bottleneck with the pump supplier for the device and the lead time it takes to purchase these pumps.

Exhibit 9: Limited competition in Flonase Drug Name Dosage Form/Route Company

FLONASE Spray, Metered; Nasal GlaxoSmithKline

Fluticasone Propionate Spray, Metered; Nasal Apotex Inc

Fluticasone Propionate Spray, Metered; Nasal Hi tech Pharma

Fluticasone Propionate Spray, Metered; Nasal Roxane

Fluticasone Propionate Spray, Metered; Nasal Wockhardt

Source: USFDA, Emkay Research

Market share & competition

§ Market Size: The market size of Flonase in the US is US$580mn.

§ Current competition: Only three other generic players are present currently – Roxane, Apotex and Hi-tech Pharma are selling Flonase in US.

§ Wockhardt’s launch of Flonase: Wockhardt launched Flonase in US in Jan’ 12

§ Revenue potential: We expect Flonase to be US$30mn & US$35mn opportunity for Wockhardt for FY13/14E respectively.

§ Competition in pipeline: Other generic filers include Watson, Teva and Amphastar. However, timeliness for approval is very uncertain. Moreover, since Flonase is difficult to genericize, any new competition entering the market may not substantially dilute the market.

Exhibit 10: Revenue expectations from Flonase for Wockhardt

5

3035

0

10

20

30

40

FY12E FY13E FY14E

Fluticasone Propotionate, US$ mn


Flonase, despite being generic for more than 7 years, remains a limited competition market with only 4 players selling in market

Flonase has a market size of USD580mn and it is difficult to genericize. Hence, any new competition entering the market unlikely to dilute the opportunity



Stalevo

Product is owned by Orion Corporation and Wockhardt is the Authorized Generic (AG). Stalevo is used to treat re-emergence of Parkinson's disease. Wockhardt and Sun have settled the patent litigation with Orion.

According to the terms of the settlement agreement, Wockhardt has launched generic Stalevo in US on 24th Apr 2012. Wockhardt has launched all the strengths except 25/100/200 mg and 37.5/150/200mg, which will be launched after 6 months as Sun is FTF on these strengths.

Current market size of Stalevo is US$58mn and there are only 3 players in the market. We expect sales of $23mn over the next 2 years and EPS of Rs3.4 & Rs3.2 in FY13E/ 14E.

Exhibit 11: Stalevo to clock annual run-rate of $12mn over the next two years

12 12

0

2

4

6

8

10

12

14

FY13E FY14EStalevo, $ mn


Comtan

Product is owned by Orion Corporation. Comtan is used to treat Parkinson's disease. Wockhardt and Sun have settled the patent litigation with Orion.

According to the terms of the settlement agreement, Wockhardt as the FTF to the Comtan patents, is eligible for 180 days of exclusivity, hence is expected to launch shortly followed by Sun, who will launch Comtan on 1st April 2013.

Current market size of Comtan is US$98mn and there will be only 3 players in the market at the time of launch. We expect sales of $10mn in FY13E and $21mn in FY14E.

Exhibit 12: Comtan expected to clock $10mn in FY13E & $21mn in FY14E

10

21

0

5

10

15

20

25

FY13E FY14EComtan, $ mn


Stalevo & Comtan to enjoy extended period of limited competition

Going ahead, since the patents are still ON for both the products ('530 patent for Comtan expires Sept 2018 and '867 patent for Stalevo expires Jun-20), we expect this to be a limited competition for an extended period of time. Mylan has also filed its ANDA with the US FDA in Jan-11 but has still not settled with Orion.

Stalevo is a USD58mn product with 3 players in market and patent protection lasting till Jan 2020

Comtan is US$98mn and there will be only 3 players in the market at the time of launch. Expect the product to get launched shortly in the US market



US Business revenue breakup

Exhibit 13: US Business detailed revenue break-up $ million FY12 FY13E FY14E Comments

Existing Business

Toprol XL 140 135 117 Assumed 5% volume expansion & 10% price erosion Current Market:$670mn; Competition: 6 players Market Share assumed: 19% for FY13 & 18% for FY14; Launched on Jul 2010

Excluding Toprol XL 201 211 222 Assumed 5% volume increase in existing business

New Launches - 144 214

Tricor - 5 15 Current Market:$1130mn; Competition: 5 players; Market Share assumed: 10%; Launched expected in Jan 2013

Stalevo - 12 12 Current Market:$55mn; Competition: 3 players including Wockhardt Market Share assumed: 15%; Launched in April 2012

Comtan - 10 21 Current Market:$55mn; Competition: 2 players; Wockhardt is FTF & patent expires in 2020 Market Share assumed: 30%; Launched expected immediately

Cymbalta - 0 12 Current Market:$3172mn; Competition: 8 - 10 players expected Market Share assumed: 15%; Launched expected Dec 2013

Flonase 5 30 35 Current Market:$580mn; Competition: 4 players including Wockhardt Market Share assumed: 6%; Launched in Jan 2012

Prevacid - 13 21 Current Market:$700mn; Competition: 6 players Market Share assumed: 15%; Launched in Sept 2012

Wellbutrin - 1 2 Current Market:$368mn; Competition: 10 players Market Share assumed: 5%; Launched in Sept 2012

Geodon - 13 20 Current Market:$1300mn; Competition: 6 players Market Share assumed: 5%; Launched in Aug 2012.

MS of existing players- DRL:31%, Lupin 34%, Innovator 15%, AG 13%, Apotex 8%

Plavix - 10 20 Current Market:$6500mn; Competition: 10 players Market Share assumed: 5%; Launched in Aug 2012

MS of existing players- Teva:28%, Mylan 20%, DRL 16%, Apotex 15.5%, Auro 6%, Sun 5.5%

Lanso OTC - 9 12 Current Market:$115mn; Competition: 4 players Market Share assumed: 20%; Launched in Jul 2012

Fexo OTC - 17 18 Current Market:$462mn; Competition: 4 players Market Share assumed: 20%; Launched in Jul 2012

Requip XL - 1 1 Current Market:$58mn; Competition: 6 players Market Share assumed: 5%; Launched in Sept 2012

Plendil - 1 1 Current Market:$66mn; Competition: 5 players Market Share assumed: 5%; Launched in Aug 2012

Uroxatral - 0 0 Current Market:$81mn; Competition: 9 players Market Share assumed: 5%; Launched in Aug 2012

Cambia - 3 5 Current Market:$50mn; Competition: 3-4 players Market Share assumed: 20%; Launched in July 2012

Actos - 2 5 10+ Players

MS of existing players- Innovator 10%, Teva:27%, Ranbaxy 27%, Mylan 36%

Lunesta - 0 9 10+ Players

Others launches - 17 7

Total US Sales, $ mn 375 490 553

Source: USFDA, Emkay Research



India business – Growth picking up

The Indian Pharma Industry currently valued at Rs686bn is growing at 13%

Exhibit 14: Top 25 Companies by Market Share – Wockhardt Ranks 19th as per MAT Aug’12 IMS Data

7%

5%4% 4% 4%

4% 3% 3% 3% 3% 3% 3% 3% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 1% 1%

0%

2%

4%

6%

8%

Abb

ott

Cip

la

Ran

baxy

GS

K

Sun

Cad

ila

Man

kind

Alk

em

Pfiz

er*

San

ofi

Lupi

n

Mac

leod

s

Inta

s

Em

cure

Aris

to

Dr

Red

dys

Tor

rent

Mic

ro la

bs

Woc

khar

dt

U S

V

Gle

nmar

k

Ale

mbi

c

Nov

artis

FD

C

Ipca

Lab

s

Source: IMS, Emkay Research

Wockhardt’s domestic formulation business recorded a growth of 13% during FY12 and 13% CAGR over FY07-12, led by strong focus on Vitamins, Respiratory, Pain & Diabetes franchisee, which contributes 55% to the domestic portfolio. With a strong sales force of 3,300 covering 4 lakh medical practitioners, it has 7 brands featuring in the top 300 rankings in the industry.

Exhibit 15: India revenues to grow at 12% CAGR over FY12-14E

9692 9260 10410 11720 13126 14833

20%13%12%12% 13%

-4%

0

3000

6000

9000

12000

15000

18000

CY08 FY10 FY11 FY12 FY13e FY14e-15%

-5%

5%

15%

25%

India Revenues, Rs mn YoY Gr.

India: 13% Revenue CAGR vs. IPM avg. gr. of 14%


Going ahead, we expect increasing thrust on sales with focus on lucrative segments to aid stronger margins and higher profitability. Strong focus on Anti-diabetes and the Nutrition franchisee would aid revenue growth. However, we conservatively project domestic formulation business growth at 12% CAGR over FY12-14E.

Exhibit 16: Wockhardt’s domestic business lagged industry growth in recent past

-4

12 1310

1615

-10

-5

0

5

10

15

20

2008 2011 2012

Wockhardt India Growth Industry Growth


Wockhardt has a strong focus on Anti-diabetes and the Nutrition business in the domestic market



Acute vs. Chronic Exhibit 17: Acute portfolio has a higher concentration at 84% Therapies (Rs mn) % Contribution MAT Aug'12 MAT Aug'11 YoY Gr.

Vitamins / Minerals / Nutrients 24% 3031 2696 12%

Gastro Intestinal 13% 1655 1659 0%

Respiratory 12% 1546 1384 12%

Pain / Analgesics 10% 1250 1140 10%

Anti-infective 10% 1195 1129 6%

Anti Diabetic 9% 1061 940 13%

Derma 7% 889 806 10%

Hormones 4% 504 559 -10%

Neuro / CNS 4% 530 491 8%

Others 6% 792 766 3%

Acute 84% 10478 9841 6%

Chronic 16% 1975 1730 14%

Total 100% 12453 11570 8%


Top 25 Brands

Exhibit 18: Top 25 brands constitute 69% of the overall domestic sales Brands, Rs mn Therapies MAT Aug'12 MAT Aug'11 YoY Gr.

Spasmo-Proxyvon Gastro-intestinal 1466 1499 -2%

Dexolac Vitamins 1075 886 21%

Practin Nutrition 504 394 28%

Bro-Zedex Cough & Cold 496 453 10%

Zedex Cough & Cold 449 393 14%

Wokadine Derma 417 372 12%

Tryptomer CNS 326 293 11%

Methycobal CNS 296 281 5%

Wosulin-30/70 Diabetes 286 237 21%

Nusobee Nutrition 285 200 42%

Glimaday Diabetes 280 260 8%

Decdan Respiratory 270 269 0%

Proxyvon Pain 261 254 3%

Aziwok Anti-Infective 251 247 2%

Ace-Proxyvon Pain 233 233 0%

Merideca Pain 219 273 -20%

Magenta Anti-Infective 197 221 -11%

Wepox Blood Related 195 170 15%

Biovac-A Vaccines 182 172 6%

Powercef Anti-Infective 169 154 9%

Zedex-P Cough & Cold 164 148 11%

Sammy Vitamins 154 161 -4%

Libotryp CNS 151 146 4%

Nadoxin Anti-Infective 148 146 1%

Buta-Proxyvon Pain 143 141 2%

Total 8618 8003 8%


Acute segment contributes 84% to the domestic portfolio, where Nutrition, Gastro, Pain are the major contributors

Wockhardt is the only Indian company besides Biocon, which has its own insulin in the Indian market



Gastro-intestinal & Pain driven by strong Proxyvon franchisee

Gastro & Pain therapies together contribute 23% of the overall domestic sales, which in turn are driven by strong Proxyvon franchisee. Currently, Proxyvon franchisee contributes 72% to the combined portfolio of Gastro & Pain. As highlighted in the table below, Spasmo-Proxyvon contributes 89% of the Gastro portfolio and Proxyvon including line extensions contributes 51% of the Pain portfolio of the company.

Exhibit 19: Proxyvon is the major contributor to Gastro & Pain portfolio

Brand, Rs mn Therapy MAT Aug'12 MAT Aug'11 YoY Gr.

Spasmo-Proxyvon Gastrointestinal 1466 1499 -2%

% of Gastro portfolio 89% 90%

Proxyvon Pain 261 254 3%

Ace-Proxyvon Pain 233 233 0%

Merideca Pain 219 273 -20%

Buta-Proxyvon Pain 143 141 2%

% of Pain portfolio 69% 79%

Total 2322 2401 -3%


Spasmo-Proxyvon

Wockhardt is currently selling Spasmo-Proxyvon, which is the no. 1 brand in Gastro with annual turnover of Rs14.7bn. Wockhardt markets this product in combination dosages as well as in single vial form. This product belongs to the antispasm anti-cholinergic category and is used in the treatment of functional bowel disorders. The antispasm anti-cholinergic category is growing at 5% annually and is currently a Rs6bn market in India.

Exhibit 20: Wockhardt is selling Spasmo-Proxyvon in 2 formulations

Type Single Formulations Combinations

Composition Dicyclomine HCL 20mg Dicyclomine/ Dextropropoxyphene Napsylate/ Acetaminophen

Therapy Gastro-intestinal Gastro-intestinal

Strengths 2 ml 10mg + 100mg + 400mg

Formulations Injection Capsule


The market for combination therapy is growing at 4% and that for plain therapy is growing at 10%, as per IMS MAT’Aug 12 data. The total anti-spasmodic market is Rs6bn and contributes ~8% of the total Gastro therapy of the IPM.

Exhibit 21: Market for Plain & Combination Antispasm Anticholinergics Rs mn MAT Aug'12 MAT Aug'11 YoY Gr.

Antispasm Anticholergenic - Combinations 472 453 4.2%

Antispasm Anticholergenic - Plain 123 112 9.9%

Total Antispasmodic market 595 565 5.3%


Gastro & Pain therapies together contribute 23% of the overall domestic sales. Proxyvon franchisee contributes 72% to these therapies

Spasmo-Proxyvon is the no. 1 brand in Gastro (used in the treatment of functional bowel disorders) with annual turnover of Rs14.7bn



Vitamins/Nutrients business post the Nutrition business sell-off still looks attractive

Prior to the sell-off of Vitamins/ Nutrients business to Danone, Wockhardt generated sales of Rs4.1bn from Vitamins & Nutrients segment. Of the Rs4.1bn, Wockhardt sold off 60% of its portfolio worth Rs2.5bn to Danone. Major brands divested were Farex, Dexolac, Nusobee and Protinex. Remaining business worth Rs1.6bn has popular brands like Practin and Sammy.

For FY12, Nutrition business had a top-line of Rs2.5bn and was growing at 14-15%.

Exhibit 22: Brands sold-off to Danone Rs mn MAT Aug'12 MAT Aug'11 YoY Gr.

Dexolac 1075 886 21%

Nusobee 285 200 42%

Protinex 207 175 18%

Farex 60 50 20%

Source: IMS, Company, Emkay Research

Post the divestment of Rs2.5bn Nutrition business to Danone, brands retained by Wockhardt still have the ability to deliver good growth in coming years. This is evident from the fact that brands like Bonistein, Feroject Injection & Practin belong to categories which are growing above or in-line with industry rates.

Exhibit 23: Vitamin brands retained by Wockhardt Other Vitamin Brands Category

B.G.Prot Vitamin B-Complex / with C

Bonistein Calcium/with Vitamins

Feroject Injection Vitamins & Minerals (Pre & Post Natal) / Antianemics

H.B Rich Vitamins & Minerals (Pre & Post Natal) / Antianemics

Nutrocal-DM Enteral/ Nutritional Products

Winofit Enteral/ Nutritional Products


The total Vitamins/ Minerals/ Nutrients market in India is valued at Rs5bn and is growing at annual rate of 14%. As highlighted in the table below, Wockhardt’s Vitamin brands belong to those sub-categories, which constitute 44% of the overall Vitamins/ Minerals/ Nutrients market of IPM.

We believe Vitamin brands retained by Wockhardt have a lot of growth potential which is yet to unfold. For e.g. Vitamin sub-category ‘Calcium preparation’ (brand Bonistein) is growing at 15% annually. Similarly the category ‘Appetite Stimulants’ is growing at 13%, whereas Practin, which belongs to this class, is growing at a robust rate of 28%.

Exhibit 24: Vitamin brands retained by Wockhardt have lot of growth potential Rs mn Sub Therapeutics MAT Aug'12 MAT Aug'11 YoY Gr. Wockhardts Brands

Calcium Preparation 704 613 15% Bonistein

Multi-vitamins with minerals 686 580 18% Feroject Inj., H.B. Rich

Vitamin B Complex 638 612 4% B.G.Prot

Appetite Stimulants 219 194 13% Practin

Total 2247 2000 12% Source: IMS, Emkay Research

Wockhardt sold off 60% of its portfolio worth Rs2.5bn to Danone. Major brands divested were Farex, Dexolac, Nusobee and Protinex

Wockhardt’s current Nutrition portfolio caters to 44% of the overall ‘Nutrition & Vitamin’ business and is growing at 14%



Wockhartd’s Diabetes portfolio

The overall Anti-Diabetic market is valued at Rs45bn, growing at 24% annually and contributes ~7% to the IPM. Out of this, the Oral diabetic market represents 73% of the total anti-diabetic market and is growing at 26% annually. Rest of the 27% comes from Insulins, which is growing at 18% annually. Wockhardt is present in both the segments and covers 53% of the total anti-diabetic market.

Insulins– Wockhardt present in 82% of this market

Insulin market is valued at Rs12bn, growing at 18% and forms 27% of the total anti-diabetic market. Insulins are categorized as Fast Acting, Intermediate & Fast Acting and Long Acting.

Exhibit 25: Market share of different types of Insulins

Long Acting16%

Intermediate & Fast Acting

69%

Fast Acting15%


Wockhardt has 2 prominent brands in this segment – Wosulin-30/70 and Glaritus.

§ Wosulin-30/70 (30% short-acting insulin + 70% intermediate-acting insulin) is growing at 21%, whereas its representative market is growing at an average rate of 17%.

§ Glaritus (Long Acting Insulin: biosimilar version of brand Glargine) is growing at 53% whereas its representative market is growing at 25%.

Exhibit 26: Wockhardt’s Insulin portfolio addresses 82% of the total insulin opportunity

Rs mn Therapy Wockhardt

Category Sales Gr. %

MAT

Aug'12

MAT

Aug'11

YoY

Gr. %

Wosulin-30/70 Short + Intermediate Acting 7923 17 286 237 21

Glaritus Long Acting 1931 25 110 72 53

Total 9854 19 396 309 28

% Presence 82%


Fast & Intermediate type Insulin

This category contributes 69% of the total Insulin market of Rs12bn and is growing at 17%. Wockhardt has Wosulin 30/70 Insulin brand in this category, Novo Nordisk is the leader in this category.

Fast & Intermediate Acting Insulin market is valued at Rs10bn, growing at 17% annually and constitutes 84% of the total Insulin market in India. Novo Nordisk is the leader in this category with a market share of 65%. Wockhardt has 4% share in this market.

The Oral diabetic market represents 73% of the total anti-diabetic market and is growing at 26% annually whereas 27% comes from Insulins, which is growing at 18% annually

Wockhardt has two prominent brands in the Insulin space – Wosulin 30/70 and Glaritus



Exhibit 27: Market share in the Fast & Intermediate type Insulin category

Others5%

Wockhardt4%

Biocon5%

Sanofi8%

Eli Lilly13%

Novo Nordisk65%


Long-acting insulin

Long Acting Insulins have no pronounced peak action, which means the insulin is released into the bloodstream at a relatively constant rate. One injection can last up to 24 hours. This is usually given once per day.

Long Acting Insulin market is valued at Rs1.93bn, growing at 25% annually and constitutes 16% of the total Insulin market in India. Wockhardt is one of the early entrants in this space and has gained a modest market share of 6.5% in this category.

Exhibit 28: Market share in the Long-acting Insulin category

Sanofi87.0%

Wockhardt6.5%

Biocon6.4%


Some of the top brands in the Insulin space in India are highlighted in the table below.

Exhibit 29: Top brands in the Insulin space Rs mn Brand Name Company Category MAT AUG'12 MAT AUG'11 Value Gr. %

Human Mixtard30/70 Abbott Intermediate & Fast Acting 2551 2347 8.7

Lantus Sanofi Intermediate & Fast Acting 1440 1165 23.7

Novomix 30 Abbott Fast Acting 1300 1002 29.8

Huminsulin 30/70 Eli Lilly Intermediate & Long Acting 769 743 3.5

Mixtard HM 30/70 Abbott Fast & Long Acting 736 582 26.5

Human Actrapid Abbott Fast Acting 620 544 14.1

Wosulin-30/70 Wockhardt Intermediate & Fast Acting 286 237 20.7

Total 7703 6619 16.4




Oral diabetes – Wockhardt present in 43% of this market

The Oral diabetic market is valued at Rs33bn, growing at 26% annually and contributes 72% to the total anti-diabetic market in India.

In the Oral anti-diabetic market, Metformin is the first-line drug of choice for the treatment of type 2 diabetes and is growing at a healthy rate of 19% YoY as per IMS MAT’Aug 2012 data. Moreover, Metformin combinations are fast out-pacing industry growth and have gained a sizeable chunk of the market.

Exhibit 30: Composition of Oral Diabetes Market of Rs33bn (% represent market share)

Others23%

Glimepiride+metform.

21%

DPP4 inhibitor and comb.17%

Pioglitaz.+Metform.+Glim.

12%Glimepride

8%

Metformin8%

Gliclazide + Metformin

6%Voglibose

5%


In the oral diabetic category, Wockhardt is present in Metformin along with combinations such as Glimepiride, Pioglitazone, Gliclazide and Voglibose. ‘Glimepiride + Metformin’ combination, which contributes 22% of the overall oral diabetes market, is growing at 28%. ‘Gliclazide + Metformin’ which contributes 6% of the overall oral diabetes market is growing at 16%.

Exhibit 31: Wockhardt’s presence in the Oral diabetic market

Rs mn Category Category Sales Category Gr.

SINGLE MOLECULE

Wockhardt brand Molecules

Metaday Metformin 2643 19

Voglase Voglibose 1705 24

COMBINATIONS

Wockhardt brand Molecule Combination

Glimaday Glimepiride + Metformin 6989 28

Mopaday Pioglitazone+ Metformin 751 -3

Trimetaday Glimepiride + Metformin 6989 28

Obax Gliclazide + Metformin 1812 16

Wockhardt in Oral diabetic market 13900 22

% of market covered 43%


However, there are few combinations, where Wockhardt is not present. Most important of such combinations are ‘Pioglitazone + Metformin + Glimepiride’ & ‘DPP4 Inhibitors’. These combinations constitute 30% of the total oral diabetic market and are growing at 31% and 73% respectively (IMS MAT’Aug 2012).

The Oral diabetic market is valued at Rs33bn, growing at 26% annually and contributes 72% to the total anti-diabetic market in India

Few combinations where Wockhardt is not present are ‘Pioglitazone + Metformin + Glimepiride’ & ‘DPP4 Inhibitors’. These combinations constitute 30% of the total oral diabetic market and are growing at 31% and 73% respectively



Exhibit 32: Top brands in the Oral anti-diabetic market Rs mn Brand Name Company Category MAT AUG'12 MAT AUG'11 Value Gr. %

Glycomet-GP U S V Glimepiride + Metformin 1126 1022 10.2

Galvus Met Novartis DPP4 inhibitor and comb. 1060 605 75.3

Janumet MSD Glimepiride 954 534 78.7

Amaryl Sanofi* Glimepiride 881 808 9.0

Januvia MSD DPP4 inhibitor and comb. 855 595 43.7

Galvus Novartis DPP4 inhibitor and comb. 695 473 46.8

Glycomet U S V Metformin 658 566 16.4

Glucored Sun* Glibenclamide + Metformin 633 549 15.5

Zoryl-m Intas Glimepiride 631 456 38.4

Gemer Sun* Glimepiride + Metformin 631 465 35.7

Gluconorm-G Lupin Glimepiride + Metformin 570 388 46.7

Glyciphage Franco indian Metformin 531 475 11.8

Amaryl M Sanofi* Glimepiride + Metformin 527 369 42.8

Onglyza BMS DPP4 inhibitor and comb. 526 277 89.9

Jalra U S V DPP4 inhibitor and comb. 519 391 32.6

Jalra-M U S V DPP4 inhibitor and comb. 476 244 94.7

Glizid-M Panacea Gliclazide + Metformin 462 382 21.1

Glynase-MF U S V Glipizide + Metformin 418 395 5.9

Tribet Abbott Glimepiride + Metformin 398 325 22.6

Glimaday Wockhardt Glimepiride + Metformin 280 260 7.6

Total 12831 9578 34.0 Source: IMS, Emkay Research

Drug Pricing Policy: Minimal impact on bottom-line

Exhibit 33: Pricing Policy Impact; ~1.5% EBITDA to be impacted

Rs mn MAT

Aug'12 MAT

Aug'11 VAL GRTH

(MAT 12) API Under DPCO MRP (Rs)

Industry Avg Price

Therapy Market (Rs Cr)

% Share

Market Share

Price Delta

Zedex 449 393 14.2 dextromethorphan Yes 53.0 45.0 116.6 3.6% 38% 18%

Tryptomer 326 293 11.0 amitriptyline Yes 22.3 18.4 50.1 2.6% 65% 21%

Decdan 270 269 0.4 dexamethasone Yes 2.1 2.2 0 0 0 0

Aziwok 251 247 1.8 azithromycin Yes 250.0 214.1 454.7 2.0% 6% 17%

Total Impact 8.2% 1.5%


§ Sales under DPCO – Approximately 10% of the sales will come under the proposed policy. Major brands which will be impacted are Zedex, Tryptomer, Decdan & Aziwork.

§ Proposed price control policy will impact 1.5% of the EBITDA

§ EPS will get impacted by Rs1.3 for FY13



Divestment of Businesses to De-Leverage Balance Sheet

In the past few years, Wockhardt has divested few of its businesses in order to bring down debt and clean its balance sheet. The recent divestment was an agreement to sell its Nutritional business to Danone at a valuation of €250m. With this, Wockhardt has received a consideration of Rs12.8bn. Its nutrition business had a top-line of Rs2.5bn in FY12 and was growing at 14-15% with popular brands like Farex, Dexolac, Nusobee and Protinex. Dexolac is an Rs1.08bn brand as per IMS Data. This has helped the company to bring down its Net debt to equity ratio below 1. With the completion of the deal, Danone has now formally entered India's baby food and medical nutrition market, with Dexolac, Farex, Nusobee and Protinex brands.

Exhibit 34: Business Divestments

Year Divestment Divestment Price

2009 Divested its German business Esparma GmbH to Mova GmbH Rs1.2bn

2009 Divested its Animal healthcare division to the French Veterinary care Co. Rs1.7bn

2012 Divestment of nutrition business - including brands Farex, Dexolac, Nusobee and Protinex

Rs12.8bn


On back of significant cash from the proceeds of business divestments, Wockhardt has successfully settled all its contingent liabilities related to derivatives or hedging contracts. The contingent liabilities have been bought down to zero after addressing the claims of Deutsche Bank and Lehman Brothers. This balance sheet clean up exercise helped boost investor sentiment and led to further re-rating of the stock.

Exhibit 35: Settlement of contingent liabilities Year Settled O/s Derivatives/ Hedging contracts (Rs bn)

2010 9.6

2011 3.7

2011 2.4


Exhibit 36: Stock Re-rating post settlement of dues

0

400

800

1200

Jun-11 Nov-11 Apr-12 Sep-120

5000

10000

15000

20000

25000

WL Price BSE_SENSEX

Stock re-rating post settlement of

contingent liabilities


The balance sheet clean up exercise helped boost investor sentiment and led to re-rating of the stock



EU – Structural changes hit Wockhardt’s profitability adversely

Wockhardt ventured into European market through the acquisition of Wallis Laboratories (a loss-making manufacturer and distributor of OTC drugs, for US$9 mn) in 1997 and then CP Pharma (a contract manufacturing company) in 2003. The merger of these two companies created Wockhardt UK.

Currently, the Europe business contributes 27% of the total revenue and mainly focuses on 5 key therapies – Diabetes, Oncology, Anticoagulants, Infections and Pain Management. It operates through 3 entities – Wockhardt UK, Pinewood Healthcare (Ireland) and Negma (France) and 6 Business Divisions – Hospitals, Retail, Oral Healthcare, Private Label Medicines, Contract Manufacturing and Exports.

Structural changes in Europe hit Wockhardt’s profitability

§ The EU pharma market, which is the second largest market after US, started witnessing increased pricing pressure on account of governments initiative to reduce the healthcare spending burden

§ Expensive acquisitions led to increased debt burden on Wockhardt’s books

§ Performance of Negma was hit hard as ART 50 (Diacerein) lost patent protection.

In order to address these issues, Wockhardt has taken significant restructuring initiatives in addition to enhanced focus on novel drugs. We expect these initiatives to lead to positive outcomes in the coming years.

Exhibit 37: Wockhardt reinforcing European presence through acquisitions Year Acquired Co. Origin Stats Price Paid Reason for Acquisition

1997 Wallis Labs UK Sales: $59 mn $18mn First acquisition in UK

2003 CP Pharma UK Presence in UK- Hospital, Generic products, contract manufacturing

2004 Esparma Germany Sales: $20 mn $11mn Help Wockhardt to expand European presence

Access to Esparma's manufacturing facilities

Sizeable portfolio of 135 marketing authorizations, of which 67 were in German

2006 Pinewood Ireland Sales: $70 mn $150mn Largest generic Co. in Ireland & largest supplier of liquid generic products in the UK

EBITDA margins: 20% larger footprint in Europe spread over UK, Ireland and Germany

Pinewood: 2nd largest palyer in hospital segment

50% of revenues from UK

Strong marketing, distribution & customer base in Ireland

2007 Negma France Sales: $150 mn $265mn Leader in Osteoarthritis, Rheumatology, Phlebotonic & CVS segment

EBITDA margins: 18% Help Wockhardt to take Negma products beyond France

4 manufacturing facilities - Injectables, creams, tablets & capsules

2007 Morton Groove US Sales: $52 mn $38mn Morton groove: strong generic presence and expertise in Speciality dermatology

Morton had portfolio of 31 products, 13 of which occupied the No.1 market position

33% revenues accrued from branded Lindane range of derma products


Exhibit 38: Europe suffered setback due to loss of patent on ART 50

390348

280244 264

290

-11%

-20%

-13%

8%10%

0

75

150

225

300

375

450

FY 08 FY 10 FY 11 FY 12 FY 13 E FY 14 E-23%

-15%

-8%

0%

8%

15%

Europe % Growth

ART 50 (Diacerin) lost patent protection




Corporate Debt Restructuring (CDR) over – Sets precedent for stock Re-rating

Faced with adverse market conditions, liquidity constraints, mounting debt of over Rs38bn in 2008, Wockhardt in order to stay afloat entered into CDR mechanism in 2009 with the help of ICICI Bank.

Under the CDR scheme, the repayment to its secured lenders is scheduled till Dec-2018. As per the approved scheme, Wockhardt allotted 912.9m Non-Convertible Cumulative Redeemable Preference Shares (NCCRPS) of Rs5 each and 424.2m Optionally Convertible Cumulative Redeemable Preference Shares (OCCRPS) of Rs5 each aggregating to Rs6.7bn. These NCCRPS and OCCRPS would be convertible in 2015 and redeemable in 2018. Major secured lenders are ICICI Bank, SBI, IDBI, IOB, BOI, PNB, HDFC Bank, & ING Vysya.

According to the management, Wockhardt’s performance has been better than the projections envisaged under the CDR scheme and has been regular in the debt servicing required as per the scheme.

Key pointers to the approved CDR Scheme were –

§ The existing loans will continue at a concessional rate of interest @ 10% p.a. which has two parts – 8% & 2%. While 8% p.a. shall be paid on a monthly basis, 2% p.a. shall be converted into Preference share capital redeemable in 2018

§ Priority loans will be made available to the company to meet the dues of creditors, operational requirements, and settlement of crystallized derivative losses. These will be repaid in 8 equal quarterly installments commencing Sep-15, 2010

§ Management has committed to sale/divestment of its non-core business estimated over a stipulated schedule from 2009 to 2015.

§ Promoters to bring in their contribution over the next one year in addition to the divestment proceeds

§ The existing Rupee term loans were to be paid over 24 quarterly installments starting July 15, 2010

§ Secured Working capital loans outside the consortium were proposed to be converted into a working capital term loan (WCTL) paid in 24 quarterly installments commencing July 15, 2010

§ Short-term loans were to be paid in 20 quarterly installments commencing January 15, 2014

§ The Company shall not execute any new derivative transaction (excluding forwards strictly for hedging purposes for a maximum period of 180 days) without prior approval of CDR committee.

Strong cash flows sufficient to meet debt obligation

Post the restructuring & sale of businesses, Wockhardt has gross debt of Rs32bn and cash of Rs7bn as on Mar 31, 2012. The debt is in the from of –

§ US$ 250mn EU debt restructured for repayment between 2013 and 2015

§ € 88mn French debt restructured over a 10-year period ending 2020 and

§ € 35mn Irish debt

However, on back of strong cash generation, Wockhardt is well placed to meet the necessary debt obligation.

As per CDR scheme, the repayment will last till Dec-2018. As per the approved scheme, Wockhardt allotted Non-Convertible Cumulative Redeemable Preference Shares and Optionally Convertible Cumulative Redeemable Preference Shares which would be convertible in 2015 and redeemable in 2018

Post the restructuring & sale of businesses, Wockhardt has gross debt of Rs32bn and cash of Rs7bn as on Mar 31, 2012



Peer Comparison

Strong margins & RoCE, next best to Sun Pharma – Candidate for Re-rating

Wockhardt’s EBITDA margins of 31% and RoCE of 28% in FY12 is next best to Sun Pharma. Despite such strong financials, Wockhardt is not getting premium valuation when compared to its peers, which we believe is unjustified. Moreover, on a one-year forward basis, the stock trades at reasonably cheap multiple of 12-13x vis-à-vis 16-20x for its peers. Hence, we believe there is strong case for valuation expansion for Wockhardt from 12-13x currently to 16-18x.

Exhibit 39: Wockhardt’s margins are in-line with its peers

37

30

21 21

12

22 2420

30

21

13 139

14 1511

0

9

18

27

36

45

Sun Wockhardt* Cadila Lupin Ranbaxy Dr. Reddy Cipla Glenmark

EBITDA Margins % PAT Margins %


Exhibit 40: Healthy return ratios for Wockhardt

25

38

23 25

35

2419

1623

43

3026

19

28

1520

0

9

18

27

36

45

54


RoCE % RoE %

Source: Company, Emkay Research * R&D fully expensed

Exhibit 41: Net Debt to Equity for Wockhardt vs. peers

-0.2

0.70.5

0.10.3 0.3

0.6

-1.7

-2

-1

0

1


Net Debt to Equity




About The Company

Wockhardt was founded by Habil Khorakiwala in the early 1960s. His father Fakhruddin T. Khorakiwala had acquired Worli Chemical Works in 1959. Wockhardt Ltd. was incorporated on July 1999.

The Company has a market capitalisation of Rs164bn and an annual turnover of Rs46bn.

In India, the company is ranked 19th with a market share of 1.82% (IMS MAT Aug’12). Wockhardt has a 3,300 strong-field force covering over 400,000 medical practitioners. It is present in pain management, nephrology, cough therapy and diabetology segments. Wockhardt has in-licensed niche, patented products in therapeutic areas of dermatology, cosmaceuticals, oncology, medical nutrition and osteoarthritis and looks to leverage on its core strength through in-licensing products to meet unmet medical needs of Indian patients.

The Company has 14 manufacturing facilities located in India, UK, Ireland &, US and there are 4 research centers. Manufacturing facilities are approved by USFDA and UKMHRA.

Exhibit 42: 14 Manufacturing facilities spread across India, US & Europe

Steriles Vials, Ampules, Cartridges, Lyophilized, Cephs, Pre-filled syringes India Europe

Biotech API's & formulations India

Oral Tablets, Capsules, Liquids, Pallets, Suspension India Europe

Topical Creams, Ointments, Powders, Gel India Europe, US

API Sterile Cephs, Chemical Synthesis, Peptide Synthesis India Europe, US

Others Spray dried nutrition, Denture cleaning tablets, Fixative cream India


Exhibit 43: Board of Directors Board of Director Comments

DR. HABIL KHORAKIWALA (Chairman)

Dr. Habil Khorakiwala founded Wockhardt in 1967. He is currently the Chairman of the Board of Governors at the Centre for Organization Development in Hyderabad, a non-profit scientific and industrial research organization, and a recognized doctoral research centre. A Harvard alumni, Dr. Habil Khorakiwala is a member of the World Economic Forum and was a distinguished speaker at its 2008 Davos meeting.

DR. MURTAZA KHORAKIWALA (M.D.)

Dr. Murtaza Khorakiwala graduated in medicine from GS Medical College, Mumbai. He holds an MBA degree from the University of Illinois, USA. A member of the executive committee of the Indian Pharmaceutical Association (IPA), he was the Past Chairman of the Marketing Committee of the Bombay Management Association.

DR. HUZAIFA KHORAKIWALA He holds a Masters degree in Business Management from Yale University School of Management, USA. He joined the company in July 1996 and over the years has run various Wockhardt businesses and served in Corporate Administration.

MR. SHEKHAR DATTA (Director)

Mr. Shekhar Datta has been a director of the Company since 2000. A mechanical engineering graduate, Mr. Datta has held directorships with Greaves Cotton Limited and Industrial Development Bank of India Ltd. He is a former member of the International Business Advisory Council of UNIDO. Mr. Datta is a former president of the Confederation of Indian Industry (CII), Bombay Chamber of Commerce & Industry and Indo-Italian Chamber of Commerce & Industry.

MR. R A SHAH (Director)

Mr. R A Shah has been a director of the Company since 2000. He is a senior partner of M/s Crawford Bayley & Co. a leading Mumbai firm of solicitors & advocates. He sits on the boards of various multinational and Indian companies.

MR. AMAN MEHTA (Director)

Mr. Aman Mehta has been a director of the Company since 2004. An Economics graduate, he has over 35 years’ experience in various positions with the HSBC Group. He headed HSBC operations in the Middle East, America, Australia and Asia Pacific.

MR. GIRI GIRIDHAR (President – Finance)

Giri joined Wockhardt in November 2010. He is well endowed with over 24 years of experience working across Asia and Europe in Finance, M&A and Strategy. Giri leads the entire finance function for the Wockhardt group




Exhibit 44: Financial Summary FY10A 15 Months

FY11A FY12A YoY Gr. (Rs mn) FY13E YoY Gr. FY14E YoY Gr.

144 211 375 78% US ($ mn) 490 30% 553 13%

144 211 235 12% Base Business 355 51% 436 23%

0 0 140 Toprol XL 135 0 117

348 280 244 -13% Europe ($ mn) 264 8% 290 10%

182 205 231 13% India ($ mn) 252 9% 280 11%

42 42 57 36% RoW ($ mn) 77 35% 104 35%

716 738 908 23% Total Sales (US$ mn) 1083 19% 1228 13%

36390 37510 46140 23% Total Sales (Rs mn) 56316 22% 65058 16%

3% 23% % YoY Growth 22% 16%

6644 Toprol XL 7025 6% 6209 -12%

39496 Base Business 49291 25% 58849 19%

% YoY Growth - Base business 24.8% 19%

7276 8332 12672 52% EBITDA (entire R&D expensed) 16685 32% 19506 17%

16.2% 22.2% 27.5% EBITDA % 29.7% 30.0%

8231 9170 14400 57% EBITDA (R&D Capitalization) 19104 33% 22301 17%

18.3% 24.4% 31.2% EBITDA % 34.0% 34.3%

EPS

-21 45 70 58% - Entire R&D expensed 102 45% 120 18%

-12 52 62 19% - R&D Capitalized 124 99% 146 17%

PE

-72 34 21 - - Entire R&D expensed 15 - 13 -

-124 29 24 - - R&D Capitalized 12 - 10 -




Key Financials (Consolidated)

Income Statement Y/E Mar (Rsmn) FY11A FY12A FY13E FY14E

Net Sales 37,512 46,091 56,256 64,989

Growth (%) 4.2 22.9 22.1 15.5

Expenditure 28,342 31,740 39,571 45,483

Raw Materials 15,162 16,820 21,108 24,513

Employee Cost 5,420 5,890 6,479 7,516

Other Exp 483 753 3,375 3,899

EBITDA 9,170 14,351 16,685 19,506

Growth (%) 39.3 56.5 16.3 16.9

EBITDA margin (%) 24.4 31.1 29.7 30.0

Depreciation 1,166 1,230 1,338 1,498

EBIT 8,004 13,121 15,346 18,008

EBIT margin (%) 21.3 28.5 27.3 27.7

Other Income 159 230 230 230

Interest expenses 2,671 2,140 1,932 1,616

PBT 5,492 11,211 13,644 16,622

Tax 86 2,350 2,938 3,495

Effective tax rate (%) 1.6 21.0 21.0 21.0

Adjusted PAT 5,406 8,861 10,706 13,127

Growth (%) 95.7 63.9 20.8 22.6

Net Margin (%) 14.4 19.2 19.0 20.2

(Profit)/loss from JVs/Ass/MI 0 0 0 0

Adj. PAT After JVs/Ass/MI 5,354 8,868 10,706 13,127

E/O items -4,447 -5,441 260 0

Reported PAT 906 3,427 10,966 13,127

PAT after MI 5,354 8,868 10,706 13,127

Growth (%) 92.9 65.6 20.7 22.6

Balance Sheet Y/E Mar (Rsmn) FY11A FY12A FY13E FY14E

Equity share capital 7,999 8,161 8,161 8,161

Reserves & surplus 3,265 6,549 17,755 30,882

Net worth 11,264 14,710 25,916 39,043

Minority Interest 0 0 0 0

Secured Loans 38,380 29,174 19,064 14,064

Unsecured Loans 115 2,608 2,408 2,408

Loan Funds 38,495 31,782 21,472 16,472

Net deferred tax liability -748 1,010 1,010 1,010

Total Liabilities 49,011 47,503 48,398 56,525

Gross Block 40,487 42,116 44,616 47,116

Less: Depreciation 14,684 16,403 17,741 19,239

Net block 25,802 25,713 26,875 27,877

Capital work in progress 8,874 9,023 9,023 9,023

Investment 896 908 908 908

Current Assets 20,732 26,895 28,062 34,591

Inventories 7,137 8,886 10,534 11,900

Sundry debtors 6,052 7,587 10,908 10,458

Cash & bank balance 4,829 7,000 2,581 5,615

Loans & advances 2,713 3,423 4,039 6,617

Other current assets 0 0 0 0

Current lia & Prov 9,126 15,036 16,469 15,873

Current liabilities 9,126 15,036 16,468 15,871

Provisions 0 0 0 0

Net current assets 11,605 11,859 11,593 18,718

Misc. exp 1,833 0 0 0

Total Assets 49,011 47,503 48,398 56,525 Cash Flow Y/E Mar (Rsmn) FY11A FY12A FY13E FY14E

PBT (Ex-Other income) 5,333 10,981 13,414 16,392

Depreciation 1,166 1,230 1,338 1,498

Interest Provided 2,671 2,140 1,932 1,616

Other Non-Cash items -4,447 -5,490 260 0

Chg in working cap 2,580 3,676 -4,153 -4,091

Tax paid -86 -2,350 -2,938 -3,495

Operating Cashflow 5,028 5,975 8,393 10,535

Capital expenditure -2,143 -1,290 -2,500 -2,500

Free Cash Flow 2,885 4,685 5,893 8,035

Other income 159 230 230 230

Investments 52 -11 0 0

Investing Cashflow -1,932 -1,071 -2,270 -2,270

Equity Capital Raised 766 162 0 0

Loans Taken / (Repaid) -1,680 -6,713 -10,310 -5,000

Interest Paid -2,671 -2,140 -1,932 -1,616

Dividend paid (incl tax) 0 0 0 0

Income from investments 0 0 0 0

Others 5,318 10,787 8,700 3,966

Financing Cashflow 1,733 2,096 -3,542 -2,649

Net chg in cash 4,829 7,000 2,581 5,615

Opening cash position 3,470 4,829 7,000 2,581

Closing cash position 4,829 7,000 2,581 5,615

Key Ratios Y/E Mar FY11A FY12A FY13E FY14E

Profitability (%)

EBITDA Margin 24.4 31.1 29.7 30.0

Net Margin 14.4 19.2 19.0 20.2

ROCE 17.4 28.2 32.5 34.8

ROE 66.3 73.5 52.7 40.4

RoIC 23.7 41.6 46.2 46.9

Per Share Data (Rs)

EPS 52.3 62.4 102.0 120.0

CEPS 59.6 92.3 110.1 133.7

BVPS 86.2 134.5 236.9 356.9

DPS 0.0 0.0 0.0 0.0

Valuations (x)

PER 28.8 24.1 14.7 12.5

P/CEPS 25.2 16.3 13.7 11.2

P/BV 17.4 11.2 6.3 4.2

EV / Sales 5.3 4.1 3.3 2.7

EV / EBITDA 21.6 13.2 11.0 9.0

Dividend Yield (%) 0.0 0.0 0.0 0.0

Gearing Ratio (x)

Net Debt/ Equity 3.6 1.7 0.7 0.3

Net Debt/EBIDTA 3.7 1.7 1.1 0.6

Working Cap Cycle (days) 87 75 83 88



DISCLAIMER: Emkay Global Financial Services Limited and its affiliates are a full-service, brokerage, investment banking, investment management, and financing group. We along with our affiliates are participants in virtually all securities trading markets in India. Our research professionals provide important input into our investment banking and other business selection processes. Investors may assume that Emkay Global Financial Services Limited and/or its affiliates may seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may participate in the solicitation of such business. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Emkay Global Financial Limited or its group companies to any registration or licensing requirement within such jurisdiction. Specifically, this document does not constitute an offer to or solicitation to any U.S. person for the purchase or sale of any financial instrument or as an official confirmation of any transaction to any U.S. person unless otherwise stated, this message should not be construed as official confirmation of any transaction. No part of this document may be distributed in Canada or used by private customers in United Kingdom. All material presented in this report, unless specifically indicated otherwise, is under copyright to Emkay. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of Emkay. All trademarks, service marks and logos used in this report are trademarks or registered trademarks of Emkay or its Group Companies. The information contained herein is not intended for publication or distribution or circulation in any manner whatsoever and any unauthorized reading, dissemination, distribution or copying of this communication is prohibited unless otherwise expressly authorized. Please ensure that you have read “Risk Disclosure Document for Capital Market and Derivatives Segments” as prescribed by Securities and Exchange Board of India before investing in Indian Securities Market. In so far as this report includes current or historic information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed.

Emkay Global Financial Services Ltd.

7th Floor, The Ruby, Senapati Bapat Marg, Dadar - West, Mumbai - 400028. India Tel: +91 22 66121212 Fax: +91 22 66121299 Web: www.emkayglobal.com

BUY Expected total return (%) (stock price appreciation and dividend yield) of over 25% within the next 12-18 months. ACCUMULATE Expected total return (%) (stock price appreciation and dividend yield) of over 10% within the next 12-18 months. HOLD Expected total return (%) (stock price appreciation and dividend yield) of upto 10% within the next 12-18 months. REDUCE Expected total return (%) (stock price depreciation) of upto (-)10% within the next 12-18 months. SELL The stock is believed to under perform the broad market indices or its related universe within the next 12-18 months.

Emkay Rating Distribution

www.emkayglobal.com

Wockhardt Initiating Coveragebreport.myiris.com/ESSBL/WOCKHARD_20121102.pdf · Wockhardt’s US business, which currently constitutes40% of revenues,is likely to grow at 21% CAGR

Documents