crisis, an eye opener for biotech sector
A spree of
back to back acquisitions along with indiscriminate raising of FCCBs
have cost Wockhardt dearly but this should be an eye opener for biotech
companies that are already reeling under financial crunches and going
for large scale borrowings.
The saga of Wockhardt, India’s sixth largest pharmaceutical
giant, is a lesson for biotech companies that are aspiring to follow
the track of “aggressive” asset building.
Indiscriminate costly borrowings and going in for huge Foreign Currency
Convertible Bonds (FCCBs) based on pure speculation, have led Wockhardt
to its present crisis with a net debt standing at over Rs 3,000 crore
as of December 31, 2008.
Wockhardt announced that it has approached the Corporate Debt
Restructuring (CDR) cell to restructure its burgeoning debts and
liabilities. Habil Khorakiwala has stepped down as the managing
director of the company and he handed over the reins to his son Murtaza
Khorakiwala. Habil Khorakiwala retained his position as the chairman of
the company. In a press statement to the Bombay Stock Exchange (BSE)
dated on March 31, 2009, Wockhardt announced that “In view of
the adverse market conditions, liquidity constraints and debt burden
the board has decided to make a reference to CDR through ICICI Bank
Limited for financial restructuring debts of the company”
Wockhardt was due to come out with its audited results in March 2009.
However in a statement to the BSE, Wockhardt announced that on account
of potential restructuring of businesses of the company and its
subsidiaries, which the company is currently evaluating the audits
could not be completed.
Not only Wockhardt but few other biotech companies are also
affected by the credit crunch. Biotech companies, perpetually reeling
under credit crunches and hiccups will be badly hit if the inertia and
lack of understanding of market dynamics continues. Without evaluating
the consequences, these biotech companies are forced to approach banks
and private equity (PE) firms to fund their projects. Industry pundits
are of the opinion that the companies are opting for a buyout or
selling part of their stakes, because under the burden of debt, biotech
companies cannot sustain on their own for a long time. This situation
is a classic example of survival of the fittest. The big fish
survives while the smaller fish gets eaten up.
Stuck between the devil
and the deep sea
Much has been spoken about its mounting debt burden, but Wockhardt has
been hit by its indiscriminate raising of FCCBs to the tune of Rs 547
crore based on market speculation that investors would inevitability
convert them into shares which could have been a good revenue churner
for the company. Wockhardt raised FCCBs at a convertible share price of
more than Rs 400 which was not agreeable to investors considering the
present volatile market dynamics and the dropping share prices of
Wockhardt to less than Rs 80. The company’s forex
predicament of last four quarters further added to the net debt burden
of Rs 3,400 crore. According to analysts, the company is in such a
tight situation that even if it wishes to sell off all its assets it
would be difficult to redeem their debts because even its acquired
companies have not been doing well, and prospective buyers have put a
freeze on investments.
The promoters of the company have pledged 43 percent of their total 74
percent stake in the company but analysts predict that even this might
not be enough to repay all its debt.
An analyst opined that there was a combination of three factors which
contributed to Wockhardt’s woes. Wockhardt raised
FCCBs, redemption of which will happen in September 2009 at a 30
percent premium which is Rs 721 crore. Financing its acquisitions
happened through external commercial borrowings (ECBs). In addition to
this Wockhardt had bought a lot of market instruments to hedge itself
against the dollar when it was moving down. Now the dollar is moving in
another direction and Wockhardt’s mark-to-market is coming at
Rs 300 crore. The global recession and pressure on generic prices in
developed markets have compounded the matters.
Immediately after the announcement of its adversity, Wockhardt share
prices fell by 11.1 percent despite the sensex moving up. Rating
agency, Credit Rating Information Services of India Limited (CRISIL),
downgraded Wockhardt’s rating under rating watch
with negative implications in the event of shortfalls and delays from
the company’s side to repay its loans. CRISIL downgraded its
rating on pass through certificates (PTCs) from P4 to P5.
Reports are that SBI has given a funding of Rs 100 crore and
Fortis Healthcare is about to buy Wockhardt’s healthcare
division and its 100 percent subsidiary, Wockhardt Hospitals. There
have been talks doing the rounds of a deal closing in between the two
groups wherein Fortis promoters will get to acquire up to 74 percent
stake in the Wockhardt Hospitals.
Biotech sales and revenues constitute a minuscule share of
Wockhardt’s total revenues, as its core business has always
been pharmaceuticals, especially generics. The company earlier had
ambitious plans to foray into the biosimilars market and currently
sells three biotech products in the Indian market—Biovac-B
(hepatitis B vaccine), Wepox (anaemia) and Wosulin (insulin).
Moreover industry experts said that Wockhardt’s insulin
product, Wosulin, has not been doing well in the market due to quality
issues and now the liquidity crisis can make matters worse.
“For a product like Wosulin, which is an expensive and
high-end product, the company can approach only a high-end doctor who
will need a lot of convincing to buy the product. Marketing of such a
product requires a huge investment that will not happen when the
company is in financial crisis,” commented the same expert.
“In addition to this, there are other biotech products which
are in the pipeline that includes Glaritus, which was launched
recently. Now with its cash tight situation, chances are that the
success rate of these products can be very low because we will see a
major drop in its investments,” commented an analyst.
Wockhardt recently launched Glaritus, a recombinant human insulin that
works slowly for over 24 hours. As an expert rightly put it,
“The fate of its biotech division depends on just six
products. Wockhardt has gone into such deep debt that it has no other
choice but to either divest its biotech division or look out for a
possible sellout or a strategic partner.”
Pfizer and French drug company, Sanofi Aventis, are reportedly doing
due diligence to pick up stake in Wockhardt’s biotechnology
business. Both these companies have been eyeing the biotech market for
a long time. Pfizer has already bought out Wyeth as a first step to
enter the biotech arena. According to reports, the value of the deal
could be about Rs 250 crore. The deal would be more in the nature of a
strategic business tie-up rather than a complete sell
out. Wockhardt established a biotech park in
Aurangabad, Maharashtra, in 2004, which has six manufacturing
facilities. Wockhardt reportedly claims that the complex has the
capacity to cater up to 15 percent of global biopharmaceuticals demand
that could be worth Rs 497,300 crore by 2010.
Biotech counterparts to
follow the same path
Despite the biotech industry growing between 15-20 percent, the problem
of running into a liquidity crisis haunts every Indian biotech company.
Experts are optimistic about the biotech sector in India, but
unfortunately the Indian biotech companies are constantly reeling under
pressures of funding for their larger-than-life plans which might force
them to go into indiscriminate borrowings. While the smaller companies
die out, the bigger ones look out for a strategic partner or selling
out stakes to a cash-rich company.
The lack of financial backing is hindering the expansion of Indian
biotech firms and a very few venture capitalists are eager to invest in
the biotech sector. Economic slowdown has made things worse for Indian
biotech companies. Biotech companies like Avesthagen have
shelved out their plans to go in for an initial public offering
Bangalore-based Avesthagen is another company which is reportedly
running under debt issues. Dr Villo Morawala-Patell, founder of
Avesthagen, told that they have put on hold many projects and they were
looking at raising funds from banks (ICICI venture being one of them)
and postponed their IPO plans. An internal source from the company
revealed that the company is under serious debt and is looking for
funds from external agencies. There were reports that many people were
laid off but Dr Patell said that these people resigned on their own
will. Reports are that the debt arises mainly from the complex business
model the company follows. The company wanted to raise around Rs 600
crore from stocks last year but even that was shelved out. Reports are
that it will now raise Rs 150 crore through private equity investment.
Now, biotech companies need to consider the feasibilities of their
ambitious projects, many of them either being shelved or delayed. The
government intervention, both at the state and central level, is the
need of the hour and this coupled with awareness among venture capital
investment firms is also needed. Experts are of the opinion that
companies of the size as that of Wockhardt should be judicious as far
as their investments are concerned. “Wockhardt went on an
indiscriminate acquisition spree without being cautious. But biotech
companies need to be very careful especially when it comes to
acquisitions, because many a time acquisition might not reap much
benefits. It is high time that Indian companies learn to be judicious
in their spending especially now in this period of global
recession,” advised a renowned auditor.