Wockhardt Ltd, one of the leading Indian pharma companies, is facing the prospects of tough times in the new year. The sluggish economic conditions, stiff generic competition in the US and Europe and marginal growth in operating profit during the first nine months of the current year has already impacted the company adversely. The current economic slow down in the US and Europe may further worsen the performance of the company in the current year as its 60 per cent revenue is coming from these regions. Redemption of its FCCBs next year may swallow much of its profits in 2009.

Currently, Wockhardt scrip is moving around Rs 105-107 on Bombay Stock Exchange as against its 52-week highest level of Rs 448 in December 2007. The scrip touched its yearly lowest level at Rs 88.80 on December 2, 2008. The promoters are holding 74.1 per cent and general public 11.16 per cent of the total equity capital of Rs 54.72 crore. The BSE Healthcare index also moved down from 4411.54 as at the beginning of 2008 to 2823.43 on December 5, 2008.

Though the consolidated net sales for the nine months period ended September 2008 improved by 39.8 per cent to Rs 2644 crore from Rs 1891 crore in the corresponding period of last year, its net profit after extra-ordinary items declined sharply by 21 per cent to Rs 218.86 crore from Rs 276.96 crore. The fall in net profit pushed down its earning per share for the face value of Rs 5 per share to Rs 21.50 from Rs 25.31 in the last period. The interest cost went up sharply by 68 per cent to Rs 136.70 crore. Based on these nine months performance, Wockhardt may manage to improve its top line growth, but its bottom line will be under pressure during full year ending December 2008 and first two quarters of 2009.

The standalone net profit for the first nine months ended September 2008 declined sharply by 79.1 per cent to Rs 37.57 crore from Rs 179.97 crore in the corresponding period of last year mainly due to higher interest cost. Its standalone net sales improved by 20.5 per cent to Rs 1134 crore. Thus, the standalone profitability is not showing any encouraging trend for the year 2008.

The company's consolidated net sales for the year ended December 2007 increased 53.4 per cent to Rs 2653 crore from Rs 1754 crore in the previous year. The net profit also increased by almost 60 per cent to Rs 385.81 crore from Rs 241.25 crore. The company management transferred an amount of Rs 338 crore to its reserves and surplus account.

With this transfer, its reserves and surplus increased to Rs 1,219 crore as at the end of December 2008. Its equity capital stood at Rs 54.72 crore and its total net worth improved to Rs 1276 crore. However, the company's secured and unsecured borrowings went up 47.2 per cent to Rs 2901 crore from Rs 1970 crore in the previous year. The company invested Rs 522 crore towards capital expenditure during 2007. Its debt-equity ratio, borrowing as percentage of shareholders fund, worked out to 2.27 during 2007 as against 1.84 in the last year.

The unsecured loans includes amount of Rs 427.60 crore for zero coupon foreign currency convertible bonds (FCCBs). The last date for the redemption of these bonds is set at September 25, 2009 and each bond will be converted into 94.265 fully paid up equity share with par value of Rs 5 per share at a fixed price of Rs 486.075 per share. Considering the current price as compared to fixed price, it is very low and the company will have to generate huge cash at the time of redemption. With the recessionary conditions and poor economic indicators in US and Europe, the growth in profit will be slower in the current year and the redemptions may put pressure on profit of 2009 also.

The company is planning to raise US$ 200 million through issuance of equity/equity linked securities for expanding its domestic and international business. Further, to give clear focus on new drug discovery programme the management decided to de-merge its R&D business into a separate entity. This will come into the effect from January 2009. The company has 5 research centres and 15 world-class manufacturing plants approved by US FDA, MHRA and other global regulatory bodies.

Recently, Wockhardt has received US FDA nod to market Ceftazidime injections in the US for treating a variety of infections. It is considered to be one of the most potent and safe antibiotic. The company launched Midazolam in the US market. In December 2008, it received US FDA approval for generic version of Augmentin suspension for marketing in the US.

To strengthen its US business, Wockhardt acquired Morton Grove Pharmaceuticals Inc in US and Negma Lerads in France during 2007. Earlier Wockhardt acquired major companies like Wallis Laboratory and CP Pharmaceuticals in UK, Esparma in Germany, and Pinewood in Ireland. These acquisitions are contributing more than 60 per cent to its total revenues. However, considering the slowdown in highly regulated markets, the trend of low price of products and competition will put pressure on earnings in the coming years.

Morton Grove's 13 products enjoy the top market position in the US. As at the end of 2007, Wockhardt has 56 products in US market. The company is set to launch Wosulin in the highly regulated market after completing necessary clinical trials. It received 45 regulatory approvals for recombinant insulin (Wosulin) in the Rest of the world markets, taking total of registered biotechnology products to 73 as at the end of 2007.

Thus, the short term prospects looks to be challenging one and the company will have to concentrate on reducing interest and other costs. The mark-to-market losses will also put pressure on bottom line as it has provided Rs 16.40 crore for the nine months ended September 2008. Its consolidated sales may be in the range of Rs 3300-3500 crore but profit will be dwindled to Rs 270-280 crore.

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