Wockhardt Comeback Sets Up Drugmaker as Target: Real M&A

For acquirers willing to look past U.S. punishments for quality and hygiene violations at two plants, Indian drugmaker Wockhardt Ltd. is offering the prospect of a return to revenue growth next year.

The Mumbai-based maker of almost 1,000 treatments worldwide has said it is addressing concerns raised last year by the Food and Drug Administration, the U.S. agency that banned sales of drugs from two of Wockhardt’s Indian factories and questioned the accuracy of laboratory records. Revenue, which took a hit after the U.S. action, is projected to rebound to almost $1 billion in 2017 as Wockhardt rolls out new products at home.

The $1.3 billion company already attracted the attention of Lupin Ltd., its Mumbai-based rival. Wockhardt could also appeal to a large generic drugmaker or an international pharmaceutical company looking to acquire a domestic business in India, Antique Stock Broking Ltd said. Logical suitors include Mylan Inc. and Actavis Plc, according to IDFC Securities Ltd.

“What’s attractive about this company, in spite of the import alerts, is its presence in India, the U.S. and Europe,” Prakash Agarwal, an analyst at CIMB Securities India Pvt. in Mumbai, said by phone. Wockhardt’s research and development team is also a strength, Agarwal said.

When FDA inspectors arrived in March 2013 at Wockhardt’s factory at Waluj, in the western Indian city of Aurangabad, they found open toilet drains and stagnant urine near the entrance to the sterile manufacturing facility. Wockhardt said Aug. 12 that U.S. revenue fell 60 percent in its fiscal first quarter ended in June following the FDA’s sales bans.

Tightening Controls

As it attempts to regain FDA approval, Wockhardt has been advised about ways to tighten manufacturing controls by consultants who previously worked for the FDA, according to Wockhardt’s latest annual report. Managing Director Murtaza Khorakiwala told analysts on a conference call in February the company “should be able to resolve most of the regulatory concerns” during the current fiscal year, which ends in March. Wockhardt said last month its “effort to put the remediation measures in place continues.”

“It’s not an existential crisis at this point in time,” said Abhishek Singhal, an analyst at Macquarie Group Ltd. in Mumbai. “If they’re able to resolve it, then things could get better.”

Wockhardt tumbled 84 percent in Mumbai trading from its peak of 2,119.50 rupees before the FDA’s March 2013 visit to a low of 339.85 rupees that December.

Sale Speculation

This year, the stock has rebounded, partly on speculation the company might sell a stake or be scooped up amid a record wave of mergers and acquisitions in the global pharmaceutical industry. It closed yesterday at 700.45 rupees.

In India, Sun Pharmaceutical Industries Ltd., the country’s biggest drugmaker, agreed earlier this year to buy Ranbaxy Laboratories Ltd., some of whose plants were also banned from exporting to the U.S. by the FDA.

Lupin, India’s second-largest drugmaker by market value, last month said it considered buying Wockhardt, though Managing Director Nilesh Gupta said no talks were taking place.

A representative for Lupin had no immediate comment. Dominic D’Souza, a spokesman for Wockhardt, didn’t respond to a call or e-mail seeking comment on Wockhardt as a potential takeover target.

Turnaround Potential

With Wockhardt under stress from bans in the U.S. -- the company’s biggest market by sales last year -- potential buyers may take interest, said Nitin Agarwal, a Mumbai-based analyst at IDFC.

“If you’re confident in your capabilities that you can turn around and manage the U.S. business in a high-quality manner, you can buy some of those assets at a relatively cheap price,” Agarwal said.

Founded by Chairman Habil Khorakiwala, Wockhardt has plants spanning India, the U.S. and Europe. Those facilities produce 979 products, according to the company’s most recent annual report.

Even as the U.S. restrictions crimp sales, Wockhardt is plowing larger sums of money and a greater proportion of revenue into developing new products and adding to its more than 250 patents worldwide.

R&D Spending

Wockhardt’s research and development expenses climbed in the three months ended in June and represented about 11 percent of revenue, up from about 7 percent in the same period a year earlier, company filings show. Sun spent 6.6 percent of revenue on research and development in its most recent quarter.

Wockhardt’s Indian sales jumped 18 percent in the three months ended June with the help of 16 new products at home. That’s more than double the number of new products introduced in the same period by Sun.

Wockhardt’s revenue is poised to rebound in fiscal 2016 and approach $1 billion by 2017 after declining in the current year ending in March, according to analysts’ estimates compiled by Bloomberg.

Most Indian companies don’t have the appetite to buy Wockhardt and resolve its U.S. difficulties, said Hitesh Mahida, an analyst at Antique Stock Broking in Mumbai. Teva Pharmaceutical Industries Ltd., Mylan and Actavis -- all based outside of India -- are among possible suitors, Mahida said.

Doing Deals

Mylan Chief Executive Officer Heather Bresch said in February the $18 billion generic drugmaker was “poised for a transaction this year.” The Canonsburg, Pennsylvania-based company agreed in July to buy Abbott Laboratories’ generic drug business in established markets such as Europe and form a new company that will be incorporated in the Netherlands.

Actavis, which has its legal headquarters in Dublin, has struck about $36 billion of deals in the past five years, according to data compiled by Bloomberg, turning itself into a generic drugmaker with a market value of about $60 billion. The U.S. accounted for about 75 percent of Actavis’s sales in 2013, the data show.

Representatives for Mylan, Actavis and Teva declined to comment on any potential purchase of Wockhardt.

Wockhardt has said it’s not a seller. A spokesman said last month the company “completely denies that it has any intention whatsoever to divest its business.” In July, Wockhardt dismissed speculation the company might sell a stake, saying there’s “no question” of such a transaction taking place.

That might not stop suitors circling the drugmaker, according to Surajit Pal, an analyst at Prabhudas Lilladher Pvt. Besides generic drugmakers, large overseas pharmaceutical companies that focus on patented medicines could sell Wockhardt’s struggling exports business to focus on the domestic distribution network and benefit from its relationships with local doctors, Pal said.

“Definitely it would be on the radar of any pharma company that wants to enhance its presence in the Indian market,” said Sarabjit Kour Nangra, an analyst at Angel Broking Ltd. in Mumbai. “They have a good basket of products.”

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