Wockhardt's financial turmoil: Company's recent stock surge signals investor confidence; is a turnaround in sight?

In the 1990s and 2000s, the company made a clutch of acquisitions, one of the reasons why its debt ballooned. A decade later, it was caught on the wrong foot when the financial crisis hit because of investments in derivatives that went bad, forcing it to enter a painful debt restructuring programme. By 2012, the company looked to have overcome its troubles, only for it to come up against some strong headwinds. The challenges were compounded by the increasing complexity of the pharma industry, characterised by stringent regulations, intense competition, and rising costs.

The pharma and biotechnology giant that Wockhardt Chairman Khorakiwala painstakingly built is now a shadow of its former self. But he is as resolute as before when he meets this journalist.

What fuels this optimism? “We have invested heavily in research and innovation, and raised funds, showing our long-term commitment. We plan to be cash-positive in the next two to three years, focussing on clinical work and reducing the need for further investment,” he says.

He’s not done just yet. In fact, he believes he’s hit upon a winning formula.

THE BAGGAGE

Those plans will have to address some historical problems that have bogged Wockhardt down. It has been on a turbulent ride over the past decade. From Rs 4,835.87 crore in FY14, gross sales fell to Rs 2,798 crore in FY24. Meanwhile, it has reported losses since FY17. It posted a loss of Rs 472 crore in FY24 against a loss of Rs 621 crore in FY23. Back in FY14, the company posted a profit of nearly Rs 843 crore. The last time Wockhardt reported a profit after tax of Rs 251.59 crore was in FY16.

Many of Wockhardt’s problems, say analysts, stem from the aggressive acquisition spree it embarked on a couple of decades ago, beginning with Wallis Laboratory in the UK and Merind in India in 1998. That was followed by CP Pharmaceuticals in the UK in 2003, Espharma GmbH in Germany in 2004, Dumex in India in 2006, Pinewood Laboratories in Ireland in 2006, Morton Grove Pharmaceuticals in the US in 2007, and Negma in France in 2007. That pushed the company’s debt to about Rs 4,000 crore in FY10.

In 2009, it suffered a body blow after its bets on complex derivatives turned costly because of the Great Recession. Those investments were aimed at optimising returns on surplus funds but led to a liquidity crunch amid increased risk aversion among investors and lenders, says Vishal Manchanda, Senior Vice President of Institutional Research at Systematix, an investment banking firm.

The company divested its non-core nutrition business to French multinational food major Danone and parts of its hospital chain to Fortis to manage its debt. In 2020, it inked a deal with Dr. Reddy’s Laboratories to sell select divisions for Rs 1,850 crore. And that divestment exercise continued until the closure of the Morton Grove facility, done as part of a restructuring of the US business to save $12 million annually.

Though it recovered by 2011 by focussing on business operations, concerns with regulatory compliance at its plants, especially those under US Food and Drug Administration (US FDA) restrictions, hindered growth.

The company has raised funds through equity dilution. The Khorakiwala family currently holds around 52% of the company.

THE PLAN

Khorakiwala has come up with a three-pronged strategy to turn the company around: focus on the company’s existing pharma base, vaccine collaborations, and introduce new products.

“Our strategy focusses primarily on biological and drug discovery investments. We have a pipeline of new drugs coming in, and future investments will come from our licensing revenue,” says Khorakiwala.

The global market for antibiotics is projected to expand from $53.90 billion in 2024 to around $85.80 billion by 2033, growing at a compound annual growth rate (CAGR) of 5.3%, according to Nova One Advisor, a global strategic market insights company.

With the impending launch of antibiotics Nafithromycin (MIQNAF) and WCK 5222 (Zaynich), Wockhardt is targeting areas with high unmet needs. MIQNAF, which has completed Phase III clinical trials, is expected to be launched in India this fiscal and in emerging markets in FY26. It is specifically designed to treat community-acquired bacterial pneumonia and respiratory tract infections. Zaynich is currently undergoing global Phase III trials for treatment of complicated urinary tract infections and is expected to be launched in India in FY25, and in the US in FY26.

“Zaynich is undergoing fast-track clinical trials in India for specific resistance cases and should be approved within a year. We will market these products in India and other emerging markets, potentially licensing them out for western markets,” says Khorakiwala.

In India, the company plans to price the antibiotic at an 80-85% discount to western markets.

Plus, the company has six new chemical entities (NCEs) with Qualified Infectious Disease Product (QIDP) status from US FDA, he says. An NCE is a novel active ingredient not previously approved globally.

Khorakiwala’s strategy is to stay in a limited market with a direct focus on his strengths. In the biologics and drug discovery sector, the global market is set to grow from $511.04 billion in 2024 to $1.37 trillion by 2033, at a CAGR of 10.4%, per MarkNtel Advisors, a consulting, data analytics, and market research firm.

The company’s pipeline includes several biologics focussed on diabetes, which are aligned with a global surge in demand and offer significant growth potential. Rapid-acting insulin analogues are being developed to improve blood sugar control in individuals with diabetes. Plus, a medication is in the development stage to be used to treat Type 2 diabetes and aid in weight loss.

Darbepoetin injections for treating anaemia have completed pre-clinical studies, with clinical studies set to begin in FY25.

With a novel antibiotic pipeline on the verge of commercialisation, Wockhardt stands a fair chance of turning its business around, says Manchanda of Systematix. “[Zaynich] is the most interesting asset in the Wockhardt antibiotic NCE pipeline. It presents a global opportunity, and the clinical evidence so far is very impressive,” says Manchanda.

Rajesh Pherwani, Founder of Valcreate Investment Managers LLP, an investment management firm, says Wockhardt needs to do two things. “They need to… find an out-licensing partner for their drugs in R&D and find a marketing partner for their biologics in the EU and the US,” he says. “The company’s research has been promising over the years, but it has not been able to deliver in line with the work.”

SHOT IN THE ARM

Wockhardt is also making progress in the vaccine market through its collaboration with the Serum Institute of India (SII), the world’s largest vaccine maker. The global vaccine market was valued at $61.6 billion in 2022 and is projected to grow to around $151 billion by 2031, at a CAGR of about 10.5%, per the ‘Global Vaccine Market Report and Forecast 2023-2031’ by Expert Market Research.

Under a profit-sharing arrangement, Wockhardt and SII are set to produce up to 150 million vaccine doses annually. This is an expansion of Wockhardt’s earlier arrangement with the UK government and AstraZeneca for manufacturing the Covid-19 vaccine. “In the UK, we have a 15-year vaccine contract with the Serum Institute, which will start generating revenue from 2025–26,” Khorakiwala says.

He is looking to create an organisation that is nimble and ready for the challenges ahead.

Adjusting its strategy, Wockhardt has shifted focus from the US market to strengthening its biological and drug discovery initiatives.

Khorakiwala highlights Wockhardt’s role as the sole supplier of vaccine doses to the UK government. “Our facilities in the UK are drawing international interest, and the Contract Development and Manufacturing Organisation (CDMO) segment will significantly enhance our UK operations,” Khorakiwala asserts.

Manchanda agrees with the opportunity in this segment. “The vaccine deal with SII should be a good cash-generating opportunity as they would be leveraging their existing manufacturing network. The incremental margin from the incremental revenue should be very meaningful,” he adds.

Then there is the hospitals business. Wockhardt has a chain of five super-specialty hospitals, two each in Mumbai and Nagpur, and one in Rajkot, that is also planning to expand into the cancer care segment. “This year, we will launch the radiation oncology specialty at Wockhardt Hospitals, Rajkot. This advanced service aims to provide state-of-the-art cancer treatment using the latest radiation technology, ensuring comprehensive care and better outcomes for patients,” says Zahabiya Khorakiwala, Managing Director of Wockhardt Hospitals, and the Founder’s daughter.

Habil Khorakiwala admits that the company’s stock has faced challenges. “But there is a growing acceptance and credibility of our new business strategies,” he maintains. That shows in the surge that the Wockhardt stock has witnessed. It has jumped 261% to Rs 955.9 as of August 9, 2024, from Rs 264.95 a year ago.

Plus, a qualified institutional placement (QIP) it launched this March to raise Rs 480 crore received strong investor interest, including from veteran investors like Madhusudan Kela, Prashant Jain and leading mutual funds such as ICICI Prudential and Mirae Asset, Manchanda says. He adds that that was because investors are confident of approval for Zaynich.

If these tailwinds continue, Khorakiwala would have scripted yet another turnaround.

@neetu_csharma