Wockhardt needs legal savvy to clear itself from the financial mess.
Wockhardt Ltd was one of the first listed Indian drug companies to tap the potential of the exotic financial instruments called Foreign Currency Convertible Bonds (FCCBs), as also hedging strategies, to earn extra money to fund business. Ironically, around five years down the line, it has become the first Indian drug major to face the possibility of winding up its business for not honouring commitments related to those FCCBs.
On March 23, Wockhardt was granted a stay by a two-judge bench of the high court here against the order of a single judge of the same court to admit a winding-up petition against the Mumbai-based company for not honouring its FCCB commitments. Wockhardt must now choose whether to go on with the legal fight for survival or heed the pressure of a section of FCCB holders and settle the issue out of court, say analysts.
Habil Khorakiwala, 67, the company’s chairman, says he won’t comment on the issue, as it is in court. The bigger HC bench will start hearing the case from May 3.
Khorakiwala has seen many such ups and downs in business, since he took charge of Worli Chemical Works, a company acquired by his father, Fakruddin T Khorakiwala, in 1959. Having seen businesses flowering and waning within the family — like Mumbai’s first retail chain, Akbarallys, and cakeshop chain, Monginis — Habil Khorakiwala was careful about this one since he transformed it into a pharmaceutical-focused company in 1973. For several years, Wockhardt remained a conservative drug company, making ample profits, with focus on the domestic market.
| EARLY GAINS Wockhardt’s major acquisitions | |
| Company | Year |
| Wallis Laboratory, UK | 1998 |
| Merind, India | 1998 |
| CP Pharmaceuticals, UK | 2003 |
| Espharma GmbH, Germany | 2004 |
| Dumex, India | 2006 |
| Pinewood Laboratory, Ireland | 2006 |
| Negma, France | 2007 |
| Morton Grove, US | 2007 |
BREWING TROUBLE
However, Khorakiwala, a Master’s degree holder in pharmaceutical science from Purdue University and with a degree from Harvard Business School, decided Wockhardt had to become a global drug company to survive in the 21st century. In the early 1990s, Wockhardt spearheaded the Indian generic industry’s rush to acquire companies abroad. Within a decade, Wockhardt did eight major acquisitions: Wallis Laboratory, UK (1998), Merind in India (1998), CP Pharmaceuticals, UK (2003), Espharma GmbH, Germany (2004), Dumex India (2006), Pinewood Laboratory, Ireland (2006) Negma, France (2007) and Morton Grove in the US (2007).
These acquisitions helped Wockhardt become the largest Indian company in the European market, with about 60 per cent of its revenues coming from that continent. The acquisitions helped Wockhardt become one of the top five domestic drug makers. When revenue in year 2006 was Rs 1,729 crore, the Wockhardt chairman projected it would become a Rs 4,500-crore entity by 2009. He positioned it as a biotechnology-driven company, focused on reverse-engineered biotech drugs.
Wockhardt also built a Biotech Park, India’s largest biopharmaceuticals complex, with six plants built to international standards, at Aurangabad. It also became the first in Asia and only the fourth company in the world to have developed, manufactured and marketed Wosulin — recombinant insulin injectables.
But, soon, financial markets around the world went into a turmoil and Wockhardt was a major casualty. The hedging strategy caused huge mark-to-market (writing down assets to reflect current value) losses. Soon, Wockhardt faced liquidity issues and its debt burden mounted to Rs 3,200 crore. After 2008, it began to post losses for successive quarters. The problems were compounded when the Khorakiwala-promoted Wockhardt Hospitals had to abort a Rs 780-crore initial public offering. And, Wockhardt had to pay $110 million worth of FCCBs by October 2009.
Many industry watchers felt Khorakiwala went overboard to make a global imprint and in the process, many acquisitions were overpaid. Khorakiwala counters this, saying all his acquired companies are doing well and are good revenue earners. “Wockhardt UK crossed sales of $100 million in the calendar year of 2010. It is the Number One Indian generic company (there), with sales revenues growing by 10.2 per cent that year. Pinewood Healthcare continues to be the leading generic company in Ireland. Wockhardt USA clocked a robust 87 per cent growth in the world’s most competitive market in the third quarter of 2010-11,” he argues.
THE COMEBACK
In an earlier interaction, he had said various factors like mark-to-market losses, banks tightening their line of credit, the impact of the global slowdown and the war of depreciating currencies caught Wockhardt unawares and aggravated its problems. “The immediate goal before us would be to get out of the CDR (corporate debt restructuring) process within one-two years,” he had said.
The first thing Wockhardt did was to set about implementing a three-year plan, monitored by a new corporate governing council, drawn from the ranks of its global management team. The plan envisaged strict cost control, creating a large branded generics portfolio in the domestic market and forays into rural markets and bio-generics. Also planned were strategic alliances with multinational companies and contract manufacturing.
Wockhardt approached its lenders to restructure the loans. In June 2009, the lenders approved the CDR package, with certain conditions. The company had to divest its non-core business of animal health and sell its loss-making German subsidiary, Esparma.
As part of the restructuring process, Wockhardt offered to buy back FCCBs due in October with a 65 per cent haircut (substraction from the par value) or to exchange the bonds for preference shares that were partly convertible in 2015 and partly redeemable in 2018. It succeeded in settling and resolving issues with three-fourth of its FCCB holders, who agreed to the fresh terms offered.
Meanwhile, Khorakiwala relinquished the post of managing director, while remaining chairman; he brought in his son, Huzaifa, as MD. The company also launched an aggressive strategy to in-license products for the domestic market and roped biotech manufacturing alliances with about 10 leading companies, including Novo-Nordisk, Astra Zeneca and Eisai. In February, Wockhardt got a major breakthrough when the company entered into a strategic global alliance with Sheffield Bio-Science of the US, to supply recombinant insulin to cell culture markets worldwide, an estimated annual market worth around $50 million.
The results are now beginning to show. After almost two years of successive losses and poor performance, Wockhardt bounced back with profits in the third quarter of 2010-11. Consolidated sales grew by seven per cent to Rs 950.80 crore for the quarter and net profit stood at Rs 141.7 crore.
While Wockhardt offered fresh terms for its FCCB payback, a group of three FCCB holders led by Singapore-based hedge fund QVT had declined to accept the offer and approached the high court with a winding-up petition. Wockhardt negotiated with them and by July last year, a settlement out of court seemed ready. Wockhardt’s offer was to pay a premium of about 10 cents per dollar to the QVT bondholders, who hold bonds worth $42 million. But the negotiations failed when drug major Sun Pharma’s arm, Sun Pharma Global, approached the court against the settlement. Sun Pharma Global said it held $20 million worth of bonds. Soon, QVT teamed with Sun Pharma and decided to continue the litigation.
Sources said the stand of Sun Pharma would have an important bearing on Wockardt’s FCCB issues getting resolved. Sun Pharma’s demand is to honour its original FCCB terms and is sticking to this stand since the dramatic entry into this FCCB litigation. While many view Sun Pharma’s entry as part of corporate rivalry, industry stalwarts view it only as a company to company financial issue.
“We have not discussed that issue, since it is a financial matter between two companies and it is up to them to resolve it,” says N R Munjal, president of the Indian Drug Manufacturers Association.
For the time being, Khorakiwala has a bit more time at his disposal to plan his next move and see if he’s allowed to put Wockhardt back on track.
