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Strong Medicine

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Such things happen to organisations rarely, probably once in a lifetime,” says Habil Khorakiwala, the 70-year-old chairman of Wockhardt, exuding the self-assurance of a man who has steered his company through its worst crisis and, in the process, scripted one of the most fascinating turnarounds in Indian corporate history.

He is referring to the near-death experience of Wockhardt at the peak of the global financial meltdown in 2008-09. The company had racked up debt of more than Rs 3,400 crore by making costly acquisitions and incurring foreign exchange losses in derivative transactions. Its losses were mounting quarter after quarter. And loan defaults led investors to threaten it with liquidation. In the end, it had to sell assets and opt for a corporate debt restructuring (CDR) programme.

Until the crisis, Wockhardt was one of the fastest-growing generic drug makers in India, with revenues of Rs 3,500 crore and 8,000 employees across the globe. But in April 2008, it reported a mark-to-market loss of Rs 581 crore. By December, it had incurred a net loss Rs 139 crore (until 2008, it followed the calendar year as its financial year). The next five quarters until March 2010 were worse, with net losses of nearly Rs 1,000 crore on account of further derivative troubles.

The pullback, since then, has been equally dramatic. Today, the company has paid its debtors; profits are back and there is cash in hand. And getting out of the CDR cell is merely a technical formality now. Khorakiwala rejigged his strategy to suit the changed reality. It entailed a shift in focus from the European markets to the lucrative US market, shedding non-core assets to pare debt, making core operations leaner and opting for a debt restructuring.

In 2010-11, Wockhardt’s consolidated sales rose to Rs 3,751 crore with a net profit of Rs 90.5 crore.

In 2011-12, revenues jumped to Rs 4,614 crore, growing 23 per cent year on year, with a profit after tax of Rs 343 crore. Its debt to equity ratio fell from 5.5 to 1.9 by the end of 2011-12. For the nine months of 2012-13 ended December, it reported sales of Rs 4,124 crore with a net profit of Rs 1,259 crore and a debt to equity ratio of below 0.5.

Wockhardt’s market capitalisation, which had eroded to Rs 749.11 crore at a share price of Rs 68.45 on 12 March 2009, rose to Rs 22,624 crore on the BSE on 8 March with the share price at Rs 2,064.

“The CDR helped them bring in working capital, loans got restructured on a long-term basis and sale of certain assets helped bring in cash to the company. The US focus with niche, difficult-to-make products and less competition helped them wipe away the big losses of the past, which is also being appreciated by the investors,” says Ranjit Kapadia, senior vice-president at Centrum Broking.

US To The Rescue
A steady stream of product launches in the US market since 2010 have seen Wockhardt’s revenues from the region grow from 18 per cent in October 2010 to 48 per cent of its global revenues and to 41 per cent overall by September 2012.

“This year, we will be clocking about $500 million from the US, which was less than $100 million three years ago,” says Murtaza Khorakiwala, Habil’s son and managing director of the company. Now, 80 per cent of Wockhardt’s revenues come from outside India.

An Emkay research report of November 2012 says the drug maker’s US business is likely to grow at a compound annual growth rate (CAGR) of 21 per cent during FY12-14, led by niche launches such as nasal spray for lung allergies Flonase, anti-Parkinson’s drugs Comtan and Stalevo, and 20 other new products. It says Wockhardt’s flagship product in the US, Toprol XL, that treats high blood pressure, had a 21 per cent market share and revenues of $140 million in 2012 and is expected to generate $120 million in 2013 and $108 million in 2014.

Besides Toprol, the company’s US growth is now driven by a niche product portfolio consisting of cardiovascular drug Metaprolol, anti-seizure drug Divalproex, Flonase and a slew of first-to-file (FTF) opportunities in Stalevo, Comtan and anti-depressant Lunesta. These are expected to contribute Rs 768.3 crore and Rs 424.4 crore to the revenues in FY13 and FY14, predicts a Ventura  Securities report.    

R&D Reward
Habil Khorakiwala attributes the US growth to a focus on research over the years, and development of generic versions of blockbuster products that are going off patent, niche products with small market size and limited competition and differentiated products with advanced and complex technology. Even during 2008, Wockhardt filed 23 abbreviated new drug applications (ANDA) with the US Food and Drug Administration (FDA) — among the most by generic companies.

In fact, Wockhardt’s research and development (R&D) spend went up from 3.9 per cent of sales in 2008 to 6.4 per cent in December 2012 (it grew 80 per cent year on year). It opened two more R&D centres in the UK; its India team comprises of 580 scientists.
The US success was also powered by the appointment of Habil Khorakiwala’s trusted lieutenant, Sunil Khera, the India and emerging markets head, as president of the Americas, which includes the US, Canada and Latin American countries, as part of top-level management changes to drive the group’s turnaround strategy.

Turnaround Times
To begin with, Khorakiwala redesignated himself as the founder chairman and group CEO of Wockhardt, handing over the day-to-day running of the group to his younger son, Murtaza, who was elevated as managing director in April 2009. A medical doctor with an MBA from the University of Illinois, Murtaza had been involved in the affairs of the company for over a decade. Elder son Huzaifa continued to run Wockhardt Foundation.

Khorakiwala also reconstituted the corporate governing council with talent drawn from various continents. Besides Khorakiwala and his two sons, old-timers who were retained in the new council included Khera, Wockhardt UK managing director Sirjiwan Singh, research head Yatendra Kumar and supply chain chief Sanjeev Mehta.

The new faces in the council included Europe head and vice-president of finance Ajay Sahni, president of human resources Nalin Garg, chief information officer Venkat Iyer, president of finance Giri Giridhar and India and emerging markets president Bhaskar Iyer. The board was also strengthened with the induction of D.S. Brar, former managing director and chief executive of Ranbaxy Laboratories.

“I knew that the basics of our business remained strong and how the revenues would come. When you have challenges, you can crumble. Here our team got more coherent, stronger, focused and committed,” says Khorakiwala, adding that the team was tasked with the implementation of a three-year strategic action plan with focus on cost control, creation of a large branded generics portfolio in the domestic market, big foray into the US with complex products and to develop bio-generics. “We reduced our operating cost, which was 41 per cent of sales at the end of 2008, to 30 per cent of sales at the end of last year. Our EBITDA  (earnings before interest, taxes, depreciation and amortisation) also moved dramatically from 18-20 per cent to 35 per cent or so,” says the founder chairman. Finquest expects Wockhardt’s EBIDTA margin at 32 per cent in 2012-13.

The focus on the US market has also changed Wockhardt’s revenue mix. Europe, which in October 2010 contributed 51 per cent of revenues (India’s share was 27 per cent then), has seen its share fall — for the first half of 2012-13, revenues from Europe were 27 per cent or Rs 609 crore out of the Rs 2,180 crore in international revenues. Wockhardt is still the third-largest generic company in the UK and the largest in Ireland.

Revenues from France were also down in the third quarter to only a few million euro. Negma was in the red last year, following loss of patent on an osteoarthritis drug that accounted for two-thirds of its revenues. “They had concealed key information from us during due diligence and we had to go for arbitration,” says Khorakiwala. Moreover, Wockhardt had to account for a goodwill write-off of around Rs 621 crore during the last quarter, related to operations of the French subsidiary.

“We believe Europe is now too complicated and there is a lot of pricing pressure due to the economic downturn,” says Khorakiwala, adding that in future the focus will be only on the UK and Ireland and that his company will go in for alliances in other European markets.

In fact, most of Wockhardt’s problems stemmed from three costly acquisitions it made in Europe during 2006-07. Worth $453 million, they were all funded through debt. The buys included Ireland-based Pinewood Laboratories ($150 million) and Negma Laboratories of France ($265 million). “It can happen. We did some 10 acquisitions in two decades for global growth, and one or two can fail,” he says.

Wockhardt’s Indian operations, now worth about Rs 1,000 crore, are also struggling to grow. They grew just 14 per cent in the third quarter of 2012-13, compared to the industry average of over 15-16 per cent year on year.
“We still have six products in the top 300 drugs sold in India and some in licensed skincare products such as methycobal are also growing fast,” says Murtaza. Analysts at Emkay expect the domestic business of Wockhardt to grow at 12 per cent per year during FY12-14.

Handling The Debt
All along, Khorakiwala was aware that the growth momentum would be impacted if he did not quickly deal with the company’s Rs 3,400-crore debt. As the company had committed to repaying loans worth about Rs 1,500 crore by the end of 2009, Khorakiwala had to make deft moves to convince bankers and suppliers. “The bankers and suppliers, who have known me and the fundamentals of the company for long, stood by us during the crisis.”

On 30 June 2009, the CDR empowered group headed by ICICI Bank approved the package for Wockhardt. Despite the mounting debt, the bankers offered Wockhardt a priority loan of Rs 516 crore, repayable in eight equal quarterly instalments and an additional working capital of Rs 255 crore. In return, the bankers demanded that Wockhardt sell non-core assets worth Rs 790 crore within six years to repay the priority loans and promoters infuse an additional Rs 70 crore in the company.

The company also had to repay foreign currency convertible bonds (FCCB) worth $110 million due for redemption in October 2009, and external commercial borrowings of $250 million. The debtors were given two options. In the first, the bondholders were offered an average discount in excess of 65 per cent of the redemption value of the bond. In the second, half the preference shares were to be optionally convertible into equity after 25 October 2015.

A clutch of FCCB holders led by Singapore-based hedge fund QVT, DBS Bank and BNY Corporate Trustee Services did not approve the package and moved the Bombay High Court demanding liquidation of Wockhardt. Later, Sun Pharma Global, a subsidiary of the local rival Sun Pharma, which held some $20 million in FCCBs bought from third parties, joined the litigation. They objected to the sale of Wockhardt’s nutrition business to Abbott Laboratories. Khorakiwala did not relent and continued private negotiations with the bondholders. Sources say that Khorakiwala first offered a premium of 3.5 cents per dollar and later raised it to 10 cents per dollar. He was able to convince the bondholders, and the petitions were withdrawn after more than a year of litigation drama. “Now, all the FCCB issues have been settled and creditors paid,” says Khorakiwala. He prefers not to comment on the hostile posture of Sun Pharma.

A Smart Sale Strategy
Still, none of his asset sales were distress hive-offs. In June 2009, just before the CDR package, Wockhardt sold its German subsidiary Esparma (bought in 2004 for Rs 49 crore) to Mova GmbH for Rs 120 crore and its Rs 77 crore veterinary business to French company Vetoquinol for Rs 170 crore.

In July 2009, Wockhardt signed an agreement with Abbott to sell its Rs 150-crore nutrition business for Rs 650 crore. Bondholders opposed the sale and, after nine months, the deal was mutually called off.

Khorakiwala wooed another suitor within 15 months — this time, it was the French multinational Danone. The deal was for Rs 1,576 crore, more than double the price Abbott offered.

In 2008, Wockhardt Hospitals had to abort a Rs 780-crore initial public offering (IPO) at the last minute due to rough market conditions. In August 2009, after months of negotiations, Khorakiwala sold 10 of the 17 hospitals to Fortis Healthcare. The deal, at Rs 909 crore, was an attractive 8-9 times of its EBIDTA. Wockhardt Hospitals, now managed by Habil Khorakiwala’s daughter Zahabiya, still has nine hospitals. A 22-storey, 350-bed tertiary care hospital is slated to come up in South Mumbai soon. Things are getting back on track.

Wockhardt is on course to exit the CDR by March, which will give Khorakiwala room for expansion of his business. But he says capital expenditure will be limited to about $50 million a year for a few years; instead, he will look for organic growth and marketing alliances in key geographies. “We will continue to file 10-15 ANDAs in the US every year,” he adds.
Khorakiwala’s big bet is on insulin and its analogues, which will progressively go off-patent in the US and Europe within 2-3 years. Wockhardt was the first in the world after Sanofi Aventis (Glargine) to launch a recombinant
long-acting human insulin analogue, branded Glaritus. It also developed Wosulin — the first r-DNA insulin developed and manufactured outside the US and Europe.

“Insulin and analogues are an $8-10 billion opportunity in the US and about $4 billion in Europe. With the first-mover advantage, we hope to garner a good share,” says Murtaza. The long-acting insulin market is valued at about Rs 193 crore in India, growing at 25 per cent annually and constituting 16 per cent of the total insulin market. Wockhardt and Biocon have a market share of roughly 6.5 per cent and the rest belongs to Sanofi.

Khorakiwala is optimistic about the future of Indian pharma and Wockhardt, saying Indian companies will make a far greater impact worldwide a decade from now. “We went global in the last two decades and have collectively made an enormous impact on the western markets, especially the US, by looking into the future, taking risks and being flexible enough to respond quickly,” he says.

That optimism is endorsed by analysts. “The fundamental business platform and vision of many leading Indian companies are very strong and Wockhardt is an example. That has helped them to escape liquidity crisis and debt issues quickly, since the basic pharmaceutical business was never affected and continued to grow,” says Sujay Shetty, India leader for pharma and life sciences at PricewaterhouseCoopers.

Still, Khorakiwala says he is wiser for the experience. “We have learnt from our experience where we can get success and where we cannot.”


(This story was published in BW | Businessworld Issue Dated 08-04-2013)