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U.S. Drug Boom Seen Improving Wockhardt’s Profit Margins

Wockhardt Group Chairman Habil Khorakiwala
Habil Khorakiwala, chairman of Wockhardt Group. Photographer: Pankaj Nangia

Wockhardt Ltd. Chairman Habil Khorakiwala says U.S. sales growth and a record profit margin may lure more investors to his company, the world’s top performing major generic drugmaker this year.

The Mumbai-based firm forecasts revenue from the biggest market for prescription medicines to increase 25 percent annually in the next few years, Khorakiwala said in an interview yesterday. Wockhardt earned about 41 percent, or $375 million, of its sales in the U.S. in the 12-months ended March 31, he said.

Wockhardt’s shares have more than tripled this year as the company sells assets to revamp $687 million of debt. Israel’s Teva Pharmaceutical Industries Ltd., the world’s largest generic drugmaker, is little changed. Khorakiwala, 69, plans to introduce as many as 15 copies of drugs each year in the U.S. to tap revenue from treatments losing patent protection.

“We are gaining market-share everywhere with our portfolio of 70 products,” Khorakiwala said, predicting a “tectonic shift in terms of the perception of our company in the next three years.”

Wockhardt, set up in 1967, fell 0.3 percent to 863.1 rupees in Mumbai after climbing as much as 1.2 percent. Five of the six analysts covering the insulin-maker recommend a buy, while one has a hold rating, according to data compiled by Bloomberg. The BSE India Healthcare Index has risen 12 percent this year.

Khorakiwala, who has been collecting art for three decades, controls about 74 percent of the company. The family has pledged 64 percent of the firm as collateral to borrow funds, according to exchange filings.

Nasal Spray

Wockhardt began rallying after the firm on Jan. 10 said its copy of GlaxoSmithKline Plc’s Flonase nasal spray was approved by the U.S. Food & Drug Administration for sale in the North American nation.

The treatment may generate $43.5 million of sales for Wockhardt in the year that began April 1, according to Ventura Securities Ltd. Wockhardt introduced 6 products in the world’s biggest economy last fiscal year, according to an investor presentation.

Sales in the U.S. helped the company widen its earnings margin before interest, taxes, depreciation and amortization to 31.2 percent in the year ended March 31, compared with 24.2 percent in 2011. Profit may more than triple to 11.6 billion rupees ($208 million) this fiscal year, according to a median estimate of four analysts compiled by Bloomberg.

Profit margins may improve further as the company gets exclusive rights to sell copies of some medicines in the U.S., according to a report by Finquest Securities Pvt. About 72 medications with annual sales of at least $100 million are expected to lose patent protection in the U.S. in the next four years, according to Bloomberg Industries.

‘Steady Stream’

Rivals are also benefiting from the drug market opening to generic competition. Ranbaxy Laboratories Ltd., India’s biggest pharmaceutical maker, became the first company to sell copies of the anti-hypertension medicine Lipitor and probably earned $300 million in sales in the first three months of the year, brokerage IIFL Ltd. said in a May 10 report.

Wockhardt’s shares are a “strong buy” because they are cheap compared with local rivals, said Anand Bagaria, an analyst with Finquest. Wockhardt trades at 8 times fiscal 2013 earnings, compared with 15.6 for Dr. Reddy’s Laboratories Ltd. and 16.8 for Lupin Ltd., according to data compiled by Bloomberg.

For the company to maintain the rally, Wockhardt will have to demonstrate that relying on exclusive sales of generic drugs will provide a steady stream of revenue, said Surya Narayan Nayak, head of research at Networth Stock Broking Ltd.

“Only when there are steady earnings for four to six quarters will the market have faith in this stock,” Mumbai-based Nayak said in a telephone interview. “Otherwise it will keep trading at a discount to its peers.”

Debt Dispute

The company’s move to resolve a dispute with bondholders has also aided in the stocks advance. In 2009, Wockhardt agreed to extend maturities of some of its debt until 2018 and capped the rate of interest at 10 percent, according to a note to investors. It also restructured $250 million loans from European lenders.

Holders of its foreign currency convertible bonds that matured in October 2009 were offered the option to swap them for preference shares redeemable in 2018, or receive a discounted single payment.

Some bondholders, including U.S. hedge fund QVT Financial LP filed a petition in the Bombay High Court to liquidate the company. The court on Oct. 11, ordered Wockhardt to pay 3.15 billion rupees in five installments to the remaining bondholders. The last installment of 1.6 billion rupees is due in August.

Asset Sale

The drugmaker in August agreed to sell its nutrition business to Danone for 250 million euros ($314 million), and plans to use the funds to pay its debt, Khorakiwala said. The sale includes the Dexolac, Farex and Protinex brands and is awaiting regulatory approval from Indian authorities.

“Investors who bought this stock last year at this time have made loads of cash,” Finquest’s Bagaria said. “There was a lot of negative sentiment associated with the company’s debt troubles and that’s what made it so cheap.”

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