Will sale of assets be enough to resolve Wockhardt#39;s problems?

December 02
22:56 2019

Of late, Indian drugmaker Wockhardt has been in the news in connection with the sale of select divisions of its domestic formulation business.

Moneycontrol on November 29 reported on Cipla emerging as a major contender for some of these divisions of Wockhardt that are up for sale. Prior to this, names of Hong Kong-based investment fund PAG, private equity fund Carlyle and Dr Reddy’s Laboratories also cropped up as potential suitors.

“From time to time, (we) keep exploring various options for sustainable growth of the Company,” the company told exchanges. It did not deny these reports.

The possible sale is expected to ease Wockhardt’s financial woes to some extent. So far, its promoters have been infusing funds to ensure that the company doesn’t default on its debt repayment obligations. In FY19, they infused Rs 250 crore in the form of redeemable preference shares, in order to refinance the company’s outstanding preference debt.

However, the company’s operating performance continues to be worrisome. In the first half of FY20, Wockhardt’s sales dropped 22 percent and losses widened to Rs 127 crore as against that in the same period of the previous year. The company has been incurring losses for the last three consecutive financial years on a consolidated basis.

In the last one year, Wockhardt shares on the BSE have shed nearly half their value. On December 2, shares of Wockhardt closed at Rs 254.55, declining 1.24 percent on the BSE.

“The ratings continued to be tempered by weak operating performance resulting in continued losses (though the net loss has declined in FY19 and Q1FY20), substantial decrease in cash and cash equivalents as well as the company’s exposure to regulated markets especially the USA, which is witnessing increased competition resulting into pricing pressure,” said Care Ratings, while revising the ratings on long term bank facilities from negative BBB- to BB+ stable in September.

However, a month before this, another ratings agency, India Ratings, had downgraded the drugmaker’s credit ratings from BBB- to BB+. The ratings firm issued a negative outlook, citing significantly elevated refinancing risks for Wockhardt in H2FY20 due to its weak liquidity position for servicing its upcoming debt maturities over the same period.

Wockhardt isn’t losing hope

The company, during the half year ended September 30, 2019, said it had repaid Rs 408 crore towards various long term debt obligations as per schedule.

“Total long term outstanding debts as on September 20, 2019 were Rs 2,098 crore as compared to Rs 2,789 crore as on September 30, 2018 and Rs 2,469 crore as on 31st March, 2019,” Wockhardt said.

Its gross debt to equity ratio as on September 2019 stood at 0.94. Wockhardt employs over 7,000 people and has a presence in the US, UK, Ireland, Switzerland, France, Mexico, Russia and many other countries. Around 72 percent of the company’s revenues comes from exports.

Why Wockhardt ended up in this state

Wockhardt, which sounds German, derived its name from Worli Chemicals. Founded in 1967 by Habil Khorakiwala, it went on to become India’s fifth largest drug company by revenues.

However, the company’s bets on complex currency derivatives pushed it into deep trouble, with mounting debt and huge losses towards 2008.

The company moved to the corporate debt restructuring (CDR) cell in the first half of 2009. To clean up its balance sheet, Wockhardt had to sell its nutrition business to French FMCG major Danone for $ 356 million. Also, group company Wockhardt Hospitals sold part of its hospital chain to Fortis for Rs 909 crore in order to repay loans.

In what can be seen as a remarkable turnaround story, Wockhardt was back in the pink by early 2011. In next two years, it grew at an aggressive pace, focusing on the US generic market.

But issues of data integrity and those related to regulatory compliance at its plants once again rocked the company. By November 2019 end, seven of Wockhardt’s facilities were placed under regulatory restrictions by the USFDA.

Two of its flagship formulation facilities – in Waluj and Chikalthana in Maharashtra, continue to be under import alerts since 2013.

The other facility in Waluj received a warning letter in 2013. Also, facilities under Wockhardt’s subsidiaries CP Pharmaceuticals Limited (UK) and Morton Grove Pharmaceuticals Inc. (US) were issued warning letters in FY17.

Morton Grove Pharmaceuticals and the facilities in Waluj contribute around 80 percent to the sales to its US markets.

While Wockhardt’s facilities continue to be compliant as per other regulatory authorities, the US regulatory problems put breaks on its growth story.

The possible sale of profitable divisions of the company’s domestic formulation business could save the company. In addition, it could give Wockhardt some cash to fund the development of a new class of patented breakthrough anti-infectives for combating multi-drug anti-microbial resistance. Wockhardt expects to commercialise these products starting FY21 onwards.Get access to India’s fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code “GETPRO”. Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.

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