Growth through acquisitions is a great way to scale up a business quickly. If it works well, it gives the company muscle. If not, it can put the acquirer at financial risk and, in the worst case, even sink the entire company.
For instance, Tata Steel’s acquisition of Corus Group put it at risk due to the great recession and declining steel prices. Bharti Airtel’s acquisition of Zain Telecom in 2010 burdened it with high debt and low profitability. Tata Motors found it challenging to manage Jaguar Land Rover after it bought it in 2008. However, after years of struggle, they all turned around.
Another name, Wockhardt Pharma, used to focus on inorganic growth through overseas acquisitions. Between the late 1990s and mid-2000s, it was on an acquisition spree, acquiring companies in France, the UK, and India.
It was once India’s seventh-largest pharma company. In 2004, its founder, Khorakiwala, was ranked 19th on Forbes’ list of 40 richest Indians.
However, Wockhardt’s acquisition spree went kaput.
The company hoped that these acquisitions would scale its business, and they did indeed. According to reports, its revenue grew from ₹1,728 crores in 2007 to ₹3,500 crores by December 2008. But, it came at the cost of surging debt, estimated at ₹4,235 crore, far more than its revenue.
That was not the end. Its problem became more extreme when it decided to hedge its exports—70% of its revenue—in 2008. This decision backfired due to the sharp depreciation of the Indian rupee.
As a result, it had to make provisions for mark-to-market losses worth ₹581 crores. Its interest costs rose by 200%, causing it to slip from a profit of ₹387 crore in 2007 to a loss of ₹139 crore in 2008, per reports. In 2009, it defaulted on its interest payment and was later downgraded by rating agencies.
Subsequently, Wockhardt adopted a financial restructuring plan to save itself.
In 2009, Khorakiwala’s son Murthaza replaced him as Wockhardt’s managing director. The company announced its intention to restructure its debt and divest certain businesses and units.
The lenders restructured Wockhardt’s debt worth ₹1,100-1,200 crore. Subsequently, it sold its German subsidiary Asparma to Mova GmbH for ₹120 crore and its veterinary business to French company Vetoquinol for ₹170 crore.
The promoter group also sold ten Wockhardt hospitals to Fortis Healthcare for ₹909 crore. According to reports, it signed a deal to sell its nutrition business to Danone for ₹1,576 crore in 2011.
The company attempted to turn things around in 2012 by selling these assets to pare some of its debt.
However, its recovery was marred by competition from existing players, rising costs, and US Food and Drug Administration (FDA) actions on its plants.
Further, in 2020, Wockhardt sold a portion of its domestic brand business and a manufacturing plant in Baddi, Himachal Pradesh, to Dr. Reddy’s for ₹1,850 crores. This aligned with its plan to focus more on the chronic business, central nervous system, and antibiotics portfolio.
These strategic shifts allowed it to focus on leveraging its strong research and development (R&D) expertise and manufacturing capabilities in specialised sectors like diabetes and antibiotics. This has started bearing fruit now.
Wockhardt’s fortunes are turning around after a long wait of over a decade
In the US, a young cancer patient suffered from a chronic thigh infection caused by a drug-resistant bacteria called pseudomonas. He was hospitalised for more than nine months without recovery.
There was no treatment left for him. Then, doctors there sought access to Wockhardt’s investigational drug Zaynich under compassionate use. It was their last resort.
Surprisingly, in June this year, after four weeks of usage, the young patient was completely cured of pseudomonas, as per reports. To date, around 30 patients have been treated under compassionate use. This drug, as per reports, has a 100% success rate and no side effects.
Zaynich is currently undergoing a global phase 3 trial. It is expected to be completed by FY2025, and then it expects to receive global approval to launch it in FY26.
It took 25 years for Wockhardt to develop Zaynich, an antibiotic for treating bacterial infections that are highly resistant to other drugs. Wockhardt’s founding chairman, Habil Khorakiwala, cited Zaynich as a one-of-a-kind antibiotic discovered in the past 50 years.
A huge addressable market size with the least competition
Zaynich has a susceptibility breakpoint of 64 mg per litre, covering approximately 10 gram-negative pathogens. This breakpoint is the highest ever granted in the US in the last 100 years.
In comparison, recent antibiotics approved by regulators typically have breakpoints of just 2–8 mg per litre. According to reports, this higher breakpoint indicates greater efficacy in tackling resistant bacterial strains.
Due to the global population’s high antibiotic resistance, Zaynich has a vast addressable market size of ₹2,11,000 crores.
In a conversation with NDTV Profit, Wockhardt’s chairman and founder, Habil Khorakiwala, said the company aims to capture 75% of this market, leaving the rest for older drugs, which recently received approval.
Furthermore, no similar drug is currently under research, and therefore, Wockhardt expects no global competition for this medicine for the next 15 years.
In terms of patients, about 7.5 lakhs suffer from antimicrobial resistance (AMR) in India, while this figure is 5 lakhs and 7 lakhs in the US and EU, respectively. About 50 lakh people die due to multi-drug resistance globally, while around 11 lakh in India, per reports.
Wockhardt’s FY24 annual report states that by 2050, annual deaths due to AMR could be one crore, costing $100 trillion in cumulative lost economic output. The World Bank estimates that AMR could result in $1 trillion in additional healthcare costs by 2050.
View Full Image
Existing drugs in this category are priced between $8,000 and $10,000 per treatment in the US. Wockhardt intends to price this drug accordingly. However, the price in India is expected to be 75-80% lower than in the US.
Moreover, revenue from India contributes only 22% of its total revenue, with the rest coming from the global market, mainly from the European Union and the United Kingdom. This gives it greater exposure to high-income countries with greater pricing power.
View Full Image
The drug market size and expected pricing offer Wockhardt a vast opportunity to grow its revenue and profitability. This is especially true given its paltry revenue of ₹2,798 crore and a loss of ₹472 crore in FY24.
The news boosted Wockhardt’s share price, which has risen more than tenfold in the last 2.0 years and 100% in the previous six months.
View Full Image
Marquee investors betting on the big opportunity
Promising drug discovery and large market size have prompted investors like Prashant Jain and Madhusudan Kela to invest in its ₹480 crore qualified institutional plan (QIP) in March CY24. Rekha Jhunjhunwala also has a 1.89% stake in the company, while Jain’s (3p India Equity Fund 1) has a stake of 1.47%.
View Full Image
Further, it recently raised ₹1,000 crores at an issue price of ₹1,105 per share through yet another QIP. Several mutual funds, including Tata MF, HDFC MF, ICICI Pru MF, SBI MF, Bandhan MF, Invesco, and Mirae, participated in the fundraising.
As of 11 November, 2024, mutual fund shareholding increased to 7.09% from 0.09% in December 2023. Conversely, FIIs shareholding rose to 6.62% from 4.18%.
It aims to use the proceeds from QIPs to retire some of its debt, fund Zaynich’s clinical trials, and invest in research and development. It has also borrowed ₹1,000 crores from the promoter, showing it has skin in the game.
Also Read: Edelweiss’ planned new avatar triggers a surge in investor interest. Is it for real?
What about Wockhardt’s financials and valuations?
Its revenues halved from ₹5,609 crore in FY13 to ₹2,798 crore in FY24, but they have stagnated in the last four years.
In terms of profitability, it posted a net profit of ₹1,594 crore in FY13 and has yet to post a profit in the previous eight years. Its debt stands at ₹2,112 crore in FY24, down from ~ ₹4,000 crores in FY10. At the same time, all other major ratios are negative.
As for valuation, since this is a loss-making company, we cannot compare it on a price/equity basis. Therefore, we have used EV/EBITDA for a like-to-like comparison.
Its current EV/EBITDA multiple of 76x is too expensive, especially considering that its peers – Sun Pharma (26x), Cipla (16x), Mankind Pharma (37x), Dr Reddy’s (11x), and Lupin (20x)—are trading at less than half its valuation.
Also Read: Sun Pharma: Down but not out?
However, the drug has not yet passed the final testing phase, and its current market price already accounts for most of its positive aspects. Even if the company gets final approval, the implementation part remains uncertain.
Moreover, there is one big limitation. Doctors cannot use Zaynich as a first-line treatment but as a last resort after other options have failed. This could present a challenge for the company in scaling up its business quickly.
Lastly, this is one of several products Wockhardt is betting on. According to reports, it has invested ₹4,200 crores in its research to date. It has delivered six successes, including Zaynich, which is at various stages of development.
Can Zyanich be Wockhardt’s game-changer like anti-obesity drugs for Novo Nordisk and Eli Lilly?
Wockhardt’s opportunity is similar to that of Novo Nordisk’s diabetes drug Ozempic, which became the miracle weight-loss drug. The drug made Novo Nordisk the most valuable company in Europe thereafter.
Even Eli Lilly’s anti-obesity drug has made it the most valuable pharma company and the 11th most valuable company globally.
Whether Zynich can work some miracle for Wockhardt and restore its glory remains to be seen.
For more such analysis, read Profit Pulse.
Note: Throughout this article, we have relied on data from www.Screener.in and Tijorifinance. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.
The purpose of this article is only to share interesting charts, data points, and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.
Madhvendra has been a passionate follower of the equity market for over seven years. He is a seasoned financial content writer. He loves reading and sharing his honest opinion about publicly listed Indian companies and macroeconomics.
Disclosure: The writer does not hold the stocks discussed in this article.
