GROWTH THROUGH ACQUISITION (A CASE STUDY OF …

Volume:01, Number:08, Dec-2011 : RJSSM Page 41 www.theinternationaljournal.org

GROWTH THROUGH ACQUISITION

(A CASE STUDY OF WOCKHARDT)

Dr. Mohender Kumar Gupta Associate Professor, Department of Commerce,

Government P. G. College (Affiliated to Maharishi Dayanand University, Rohtak),

Faridabad-121002, Haryana, India.

Mehak

Associate Professor, Department of Finance,

D.A.V. Institute of Management (Affiliated to Maharishi Dayanand University, Rohtak),

Faridabad-121001, Haryana, India.

Abstract

The paper is a case study of an Indian pharmaceutical company-Wockhardt. It is based on the

acquisitions made by the company since 2000. Wockhardt is ranked amongst the top 5

pharmaceutical companies in India. The company is known for developing Asia’s first

recombinant insulin-Wosulin. Further it is also the largest Indian pharmaceutical company in

UK. Through a series of acquisitions in Europe it has established a very strong foothold there.

The paper tries to analyses how the acquisitions have helped the company grow over the

years. It also involves the opinions of the employees working at various levels in the

company. Further, ratio analysis has been used as a statisitical tool.


INTRODUCTION

With the easy availability of capital and increased global interest in India's research and

development capability, the country's pharmaceutical industry offers a good climate for

mergers and acquisitions. Pharmaceutical companies have discovered that it is

more economical to buy out or merge with another company than to invest in a start-up,

because the element of uncertainty is always there. During 2005-06, the Indian

pharmaceutical market at $5.5 billion represented 1.8 per cent of the global market and

ranked fourth in terms of volume and thirteenth in value1 (Mr Cesar Menezes, Managing

Director, Wallace Pharmaceuticals Ltd, and Chairman, India Pharma Inc, November 2006).

More and more Indian companies are opting for acquisitions abroad in the regulated market.

This has many benefits. First of all they get a ready market for their products without getting

entangled in any legal hurdle. Secondly they are able to gain control over the latter companies

manufacturing facilities. These facilities have the required regulatory approval from their

respective countries’ (UK, France and Ireland) governments. Also they are able to gain

control over the profitable products of those companies. Further, acquiring already

established companies in the regulated markets is helping Indian companies increase their

knowledge base. This knowledge base i.e. the R&D expertise is helping them develop newer

and better drugs.

Table1

Merger and Acquisition deals by Indian companies in the past 10 years

S.No. Announcement

date

Target

Company

Acquiring

Company

Deal

Value

(In

crores of

Rs.)

Motive for

merger

Target

Country

1 June, 2008 Zandu

Pharmaceutical

works

Emami 5.8 To gain control

over products

India

2 May, 2008 Dow pharma

small molecules

business

Dr.

Reddy,s

Lab

NA To gain control

over contract

manufacturing

business of UK

UK

3 May, 2008 BASF

Pharmaceuticals

Dr.

Reddy,s

Lab

NA To gain control

over

manufacturing

site in S. Africa

South

Africa

4 April, 2008 Draxis Health Jubilant

Organosys

2.5 To enter North

American

market and

overcome legal

barriers

Canada

5 May, 2007 Taro Pharma Sun

Pharma

454 To gain control

over R&D

facilities

Israel

6 May, 2007* Negma

Laboratories

Wockhardt 265 To enter the

French market

and overcome

legal barriers

France


7 April,2007 Nippon

Universal

Pharmaceuticals

Ltd.

Zydus

Cadila

12 To enter

Japanese

market and

overcome legal

barriers

Japan

8 Mar,2007 Liva Healthcare Zydus

Cadila

15 To acquire

products

India

9 Oct, 2006* Pinewood

laboratories

Wockhardt 686 To enter the

Irish market

and overcome

legal barriers

Ireland

10 June, 2006* Dumex India Wockhardt 100 To gain control

over the

products

Indian

subsidiary

of Royal

Numico

NV of

Netherlands

11 May, 2006 BeTabs

Pharmaceuticals

Ranbaxy 70 To enter S.

African

marketv

South

Africa

12 April, 2006 Pfizer’s

manufacturing

site in UK

Nicholas

Piramal

India

Limited

NA To gain control

over the

manufacturing

site and also

the customers

13 March, 2006 Terapia Ranbaxy 324 To acquire

manufacturing

units, an R&D

center and gain

control over

products

Romania

14 Feb, 2006 Betapharm Dr.

Reddy’s

Lab

570 To enter

German market

and overcome

legal barriers

Germany

15 Dec, 2005 Bouwer Bartlett Glenmark NA To enter South

African market

and overcome

legal barriers

South

Africa

16 Dec, 2005 Able Labs Sunpharm 23 To gain control

over research

molecules

US

17 Nov,2005 Nihon Pharma Ranbaxy NA To enter

Japanese

market and

overcome legal

barriers

Japan

18 Nov,2005 Roche’s API

facility in

Mexico

Dr.

Reddy’s

Lab

58.97 To gain control

over

manufacturing

site

Mexico

19 Oct, 2005 Servycal SA Glenmark NA To gain control

over oncology

South

Africa


products

20 Oct, 2005 Target Research Jubiliant

Organosys


over contract

research

business

NA

21 Oct, 2005 Avecia

Pharmaceuticals

Nicholas

Piramal

India

Limited

9.5 To establish

itself in UK

and also enter

the contract

research

business in UK

UK

22 Sept, 2005 Explore Labs Matrix

Labs

NA To gain control

over products

Switzerland

23 Sept, 2005 Valeanc Mfg. Sun Pharm NA To gain control

over

manufacturing

facilities in US

US

24 July, 2005 Trinxy Labs Jubiliant

Organosys

12.3 To enter US

market and

overcome legal

barriers

US

25 June, 2005 Heumann

Pharma GmbH

& Co Gen

Torrent NA To enter

German market

and overcome

legal barriers

Germany

26 June, 2005 Doc Pharma

NV

Matrix

Labs

2.63 To enter the

Belgium

market and

overcome legal

barriers

Belgium

27 June, 2005 Biopharma Srides

Arcolab

1 To enter the

Latin American

market and

overcome legal

barriers

Latin

America

28 May,

2005*

Esparma GmbH Wockhardt 49 To enter the

German market

and overcome

legal barriers

Germany

29 March, 2005 Uno-Ciclo

Hormonal

Brand

Glenmark 4.6 To enter

Brazilian

market and

overcome legal

barriers

Brazil

30 Feb, 2005 Strides Latina Srides

Arcolab

6 To enter

Brazilian

market and

overcome legal

barriers

Brazil

31 Feb, 2005 Mchem Pharma

Group

Matrix

Labs

NA To enter

Chinese market

and overcome

legal barriers

China


32 Dec, 2004 Rhodia

Anesthetics

Business

Nicholas

Piramal

14

33 Dec, 2004 Global

inhalation

anaesthetics

business of

Rhodia

organique Fine

Ltd.

Nicholas

Piramal

India

Limited

61.5 To enter the

UK market and

overcome legal

barriers

UK

34 June, 2004 Psi Supply NV Jubiliant

Organosys

NA To gain control

over products

Belgium

35 May, 2004 Trigenesis

Therapeutics

Inc.

Dr.

Reddy’s

Lab

11 To gain control

over research

facilities

US

36 May, 2004* Esparma GmbH Wockhardt 11 To enter

German market

and overcome

legal barriers

Germany

37 April2004 Laboratories

Klinger Do

Bras

Glenmark 5.2 To enter

Brazilian

market and

overcome legal

barriers

Brazil

38 Feb,

2004*

Canere

Activities and

Fine Chemicals

Nicholas

Piramal

India

Limited


over

manufacturing

facility

India

39 Dec, 2003 RPG Aventis Ranbaxy 84 To gain control

over products

France

40 July, 2003 Alpharma Cadila 6.2 To enter French

market and

overcome legal

barriers

France

41 July, 2003* CP

Pharmaceutical

Wockhardt 17.7 To gain control

over R&D

facilities

UK

42 April, 2003 Global Bulk

Drugs and Fine

Chemicals

Nicholas

Piramal

India

Limited

52 To gain control

over

manufacturing

facilities

India

43 Jan, 2002 ICI Limited Nicholas

Piramal

India

Limited

70 To gain control

over products

India

44 April, 2000 Rhone Poulenc

India Limited

Nicholas

Piramal

India

Limited

236 To gain control

over

manufacturing

facilities and

products

associated with

it

Indian

subsidiary

of a UK

firm

(Source: Details collected from websites of various companies)


Table 1 shows some of the major pharmaceutical deals by Indian companies in developed and

developing countries in the recent past. All the acquisitions have been done in the developed

countries. The deals have helped the Indian companies to establish their presence in the

foreign markets. The present study is based on the acquisition deals done by an Indian

company - Wockhardt. Wockhardt has acquired a few companies in the regulated markets in

the recent past. Through the study an effort has been made to find out how far these mergers

and acquisitions are successful.

OBJECTIVES

The present study throws light on the way Indian companies are acquiring foreign companies

to establish their presence abroad. It further attempts to find out how far such deals are

successful. Thus the main objectives of the study are-

1. To find out the reasons for acquisitions by Indian firms abroad.

2. To find out whether these acquisitions prove useful for the acquiring company.

RESEARCH METHODOLOGY

For the purpose of study a company has been taken as a sample. The name of the company is

Wockhardt. Wockhardt is ranked amongst the five largest pharmaceutical companies in

India2. The reason for selecting Wockhardt as a sample company is because Wockhardt has

in the past six years acquired 5 companies. All the deals were made in Europe and today

Wockhardt is the largest Indian pharmaceutical company in UK (www.wockhardtin.com). It

has acquired this status only through acquisitions. The data for the study is both primary and

secondary. The primary data is based on the personal interview of employees of Wockhardt.

The employees selected belonged to the sales, human resource, administrative and finance

section of the company. The interview was conducted with the help of questionnaires. Further

some employees were also approached through e-mails. The area for collection of primary

data was mainly the regional office of the company in Delhi. Sales employees working

Faridabad, Gurgaon (Haryana), Noida (Uttar Pradesh) were also approached. Table 2 shows

the relevant details of the employees interviewed.

Table 2

Details of the employees surveyed Particulars Number of Employees

Total Employees approached 27

Employees personally interviewed 25

Employees interviewed in Delhi 9

Employees interviewed in Faridabad 8

Employees interviewed in Gurgaon 5

Employees interviewed in Noida 3

Two employees who were contacted through e-mail were working in the Head Office of the

company in Mumbai. Secondary data has been analysed using ratio analysis.


LIMITATIONS OF THE STUDY:

The study is based on secondary data. These are collected from the annual reports of the

company. The financial calendar of the company is from Ist January to 31st December each

year. The annual reports of the company are released by the end of April or beginning of May

each year and hence the annual report for the year 2008 has still not been released. Due to

this limitation the financial data for the same year (2008) could not be incorporated in the

study as the annual report had was not been released by the company by the time this study

was submitted.

ABOUT WOCKHARDT

Wockhardt is a global, pharmaceutical and biotechnology company that has grown by

leveraging two powerful trends in the world healthcare market - globalization and

biotechnology. The Company has a market capitalization of US$ 1.3 billion and an annual

turnover of US$ 285 million (Rs. 12.39 billion). Wockhardt has a strong and growing

presence in the world’s leading markets, with half of its revenue coming from Europe and the

United States. Wockhardt’s market presence covers formulations, biopharmaceuticals,

nutrition products, vaccines and active pharmaceutical ingredients (APIs).

Acquisitions by Wockhardt

CP Pharmaceuticals

Objective of acquisition-

1. To enter the UK market.

2. To have access to the manufacturing facilities of CP pharmaceuticals as these had the

required regulatory approval from UK and US authorities.

On July 10, 2003, Wockhardt Ltd announced the acquisition of the UK-based CP

Pharmaceuticals Ltd for a total consideration of Rs 82.46 crore. The acquisition was funded

through internal accruals and borrowings. With this acquisition, Wockhardt was able to

establish a significant presence in the European Union and especially the UK market. CP

Pharma had strategic relationships with some of the leading international pharmaceutical,

biotechnology and drug delivery technology companies, for whom it undertook contract

manufacture in injectables, freeze dried products, solid dose tablet formulations as well as

liquids, creams and ointments. This was the largest overseas acquisition by an Indian

pharmaceutical company and had brought Wockhardt amongst UK's top 10 generic

pharmaceutical companies. It also made Wockhardt the largest Indian pharma company in

UK.

Esparma Gmbh


1. To enter the German market. Germany is the largest branded generics market in

European Union (Habil Khorakiwala, CMD Wockhardt Limited, in an interview to

rediff.com, May 4, 2005).

2. To gain control over the marketing and sales team of Esparma. Further, Esparma had

9 international patents and 94 trademarks.

http://rediff.com/


Wockhardt Ltd acquired Esparma Gmbh, a German pharma company for Rs. 49 crore on

May 6, 2004. The acquisition did not include the company's manufacturing facility but

covered the businesses, sales and marketing organisation and the name of the company.

Wockhardt continued manufacturing at Esparma facilities, which were sold to another buyer.

The toll manufacturing agreement was for a period of two years, after which Wockhardt

shifted its manufacturing to its other existing facilities in the UK and India. Wockhardt had

set up a company called Wockhardt Germany, GmbH to facilitate the acquisition. The

acquisition was funded through internal accruals and borrowings.

Negma Laboratories


1. To enter the French generics market.

Negma had 172 international patents. The company also had leading positions in the various

therapeutic segments in France.

On 3 May 2007, Wockhardt Limited announced the acquisition of Negma Laboratories, the

fourth largest independent, integrated pharmaceutical group in France with sales of $ 150

million. Wockhardt acquired Negma Laboratories in an all-cash deal worth $ 265 million.

With this acquisition, Wockhardt became the largest Indian pharmaceutical company in

Europe with more than 1500 employees based in the continent. Negma was the first research

based pharmaceutical company, with 172 patents, acquired by any Indian company so far.

The acquisition allowed Wockhardt to extend this patented portfolio to other European

markets where Wockhardt enjoyed a strong presence. Further, it also provided Wockhardt the

right entry vehicle to enter the French generics market. Negma had a strong research and life

cycle management capability. It owned a rich portfolio of 172 patents and an exciting range

of products in various stages of development. The acquisition was mainly funded through

internal accruals and borrowings.

Pinewood Laboratories


1. To enter the Irish market.

2. To gain control over the marketing and sales distribution system of Pinewood.

Wockhardt Ltd acquired Pinewood Laboratories Ltd, an Irish generic-drugs maker in an all-

cash deal worth Rs 686 crore on October 3, 2006. The deal gave Wockhardt a larger footprint

in Europe spread over the UK, Ireland and Germany. The acquisition reinforced Wockhardt's

position in the UK where it was already the largest generic company from India and the

second largest player in hospital sales. The acquisition was a strategic fit with Wockhardt, as

Pinewood's liquids and creams business complemented Wockhardt UK's strengths in

injectable and solid dosages. Pinewood manufactured liquids, creams/ointments and powders

under its own licenses in Ireland, which were distributed to its international markets directly

from its facility located in Tipperary. Pinewood also supplied contract manufacturing from

this facility for the international market.


Dumex India


1. To gain control over the two leading brands in the Indian Nutrition market-Protinex

and Farex. Through this acquisition Wockhardt wanted to become the market leader

in this segment.

2. To obtain technical know-how for manufacturing specialised sugar-free infant food

products from the parent company-Royal Numico.

On 30 June 2006, Wockhardt acquired Dumex India Pvt. Ltd. from Royal Numico NV of The

Netherlands, for approximately Rs.100 crores. Wockhardt acquired the company mainly to

gain control over latter’s two main products- Protinex and Farex. These two products have

over 50 years of brand equity in India. Protinex is the market leader and the largest prescribed

brand in the nutrition segment. The two brands are a natural fit that complement Wockhardt's

product range. Wockhardt plans to double its nutrition products sale with this acquisition.

Wockhardt has market leadership with a 15-per cent share of the Indian nutrition market

(http://www.wockhardtin.com/). The acquisition made Wockhardt the leader in medical

nutrition business in India (http://www.wockhardtin.com/). Under the agreement, Wockhardt

also got the technical know-how to manufacture specialised sugar-free infant food products

currently being marketed in India and internationally, under its brand names Dulac and

Dupro. Currently these products are imported from New Zealand and Malaysia.

Analysis of motives of acquisition

During the course of study it was found that in the past 5 years Wockhardt has made 5

acquisitions. There were certain features that were common in all acquisitions. For e.g.- All

the five acquisitions were done in quick succession. Wockhardt acquired companies that were

based in Europe or had roots in Europe. This shows that the company was specifically on an

acquisition spree. Moreover all the five companies acquired belonged to different countries

and were profit-making concerns. None of them was a sick or loss making company. Hence

this shows that Wockhardt wanted to strengthen its roots in Europe

All the 5 companies acquired had patent protected drugs. In case of Dumex it said that apart

from the products (Farex and Protinex) it also wanted to get the technical knowhow from the

parent company (Royal Numico). This shows that Wockhardt wanted to enrich its R&D base

After each acquisition the company said it wanted to gain control over the marketing facilities

of the acquired company. Wockhardt openly said that it wanted to use the marketing base of

the acquired company to sell its products in the native country’s market. This shows that the

main objective of all the acquisitions was to expand its marketing base. In case of Dumex, the

acquisition was mainly driven the desire to gain control over the products that have been the

market leaders in India-Protinex and Farex. This shows that no matter the acquisition is in

India or outside India; Wockhardt was in a quick hurry to increase its marketing base and

hence increase its sales and profits.

Table 3

Response Opinions of company employees towards acquisitions

Statement Yes No Can’t say

Do you think Wockhardt could have grown better without these five

acquisitions?

28% 67% 5%

http://www.wockhardtin.com/



The respondents belonged to finance section and the sales section of the company. The result

has been expressed in percentages in Table 3 for easy understanding. The respondents who

said yes to the above statement said that acquisitions have become the central focus of the

company. Instead of growing organically the company is focusing more on the inorganic

growth. However, during the primary data collection the sales head of the North region of

Wockhardt was interviewed. He defended these acquisitions and said that Wockhardt is

acquiring companies in Europe only to ease its regulatory hurdles. He said that when any

company wants to enter a new country, there are many regulatory hurdles that it has to cross.

Getting settled with the economic and legal environment of that country may take time.

During this span the company may miss out some of the great opportunities. Hence

acquisitions are only a way to save time. Acquiring already established companies in foreign

countries gives a foothold to the parent company. He further added that Wockhardt is

working hard and apart from making acquisitions abroad, the company is also strengthening

its roots. In defense of his opinion he gave us a list of some of the main achievements of the

company in the recent past. They have been illustrated as follows:

In February 2005, Wockhardt set up majority joint ventures in Mexico and South Africa. In

both the joint ventures Wockhardt had 51% shares. The company also established a wholly

owned subsidiary in Brazil. The joint ventures and the subsidiary were established to market

the company’s pharmaceutical and biopharmaceutical products in the native country markets.

In February 2005 Wockhardt launched India’s first automatic insulin delivery device. The

device made injecting insulin in the body almost painless for the diabetic patients.

In April 2005, Wockhardt inaugurated its formulations plant in Himachal Pradesh. The plant

is a world-class facility and has the capacity to manufacture 2 billion tablets and capsules a

year.

In April 2004, Wockhardt launched its own marketing and sales organisation in US by the

name of Wockhardt USA Inc. to enter the US market.

In June 2004, Wockhardt received USFDA (United States Federal Drug Association)

approval for 6 plants. The plants are located in Aurangabad, Waluj and Ankleshwar. The

Aurangabad facility also received the approval from MHRA (Medicines and Healthcare

products Regulatory Agency) of UK.

In August 2004, the then President of India Dr. A.P.J. Abdul Kalam inaugurated the

Wockhardt Biotech Park. It is India’s largest biopharmaceutical complex. The plant has the

capacity to cater to 10%-15% of the global demand for major biopharmaceuticals.

Statement : Are you satisfied with the company’s R&D capability?

The respondents were asked to express their views on the company’s R&D capability.

Towards this the respondents said that the company has some of the most talented scientists

in the country. They said that the Biotech Park, which was inaugurated in 2004, has some of

the best facilities in the country. The company has also been able to achieve some initial

successes in R&D like the launch of Wosulin, Asia’s first recombinant insulin. They also

cited the example of Wosulin Cartridge that enables injection of the exact amount of insulin

required by the patient. They said that the company has further also developed the Wosulin

Pen, using third generation technology. The pens have been certified under ISO 11608.

Wosulin Pen is a device developed for injecting insulin in the body by arthritic patients and


those having poor visibility. On an overall basis the company is putting efforts towards its

R&D process. However they further added that till date the company has not been able to

manufacture any product patented medicine. Through its acquisitions in India or abroad, the

company has increased its market share and is launching off-patent drugs. Although the

company has been able to launch some ANDAs but a product patent is still awaited. To

verify the arguments of the respondents I made an analysis of some of the product launches

by the company in India, US and Europe in the recent past. The result that came forward has

been tabulated below in Table 4.

Table 4

Product launches in US and Europe S.No. Date Name Usage Description

1 Jan, 2009 Enalapril Maleate

Tablets (10mg and

20mg)

To treat high blood

pressure

It is the generic version of

Vasotec of Merck of USA

2 Jan, 2009 Lisinopril Tablets

(2.5 mg and 40mg)

Hypertension Generic version of Zestril of

Astra Zeneca of UK

3 June, 2008 Ranitidine Tablets

(300mg)

To heal and prevent

ulcers

Generic version of Zantac of

GSK (UK)

5 June, 2008 Cimetidine HCl

Oral Solution

To prevent ulcers Generic version of Tagamet

of GSK (UK)

4 July, 2007 Sertraline HCl

Tablets (100mg)

For depression and

obsessive compulsory

disorder

Generic version of Zoloft

manufactured by Pfizer

(USA)

7 December ,

2006

Ondansetron To control nausea and

vomiting following

cancer chemotherapy

It is the generic version of

GSK’s Zofran injection The

patent for the product expired

on December 24, 2006.

8 August 31,

2006

Cefotaxime

injection

Antibiotic Generic version of Sanofi

Aventis’ Claforan injection.

9 June, 2006 Divaloproex

Sodium

Anti-epileptic drug Generic version of Abbott’s

Depalrote DR tablets. Patent

expires on June 29, 2008.

10 June, 2006 Vitix Treatment of

leucoderma – a skin

disorder

In-licencing agreement

signed with LSI, a UK based

company to market the

product in India

11 June, 2006 Clarithromycin

tablet

Antibiotic Generic version of Abbott’s

Biaxin tablet

12 February,

2006

Ranitidine’s OTC

version

Anti ulcer drug Generic version of Pfizer’s

Zantac tablet

13 September,

2005

Cefuroxime Axetil Antibiotic Generic version of GSK’s

Ceftin

(Source: Annual Reports of Wockhardt)

Wockhardt entered the European market in 2003 and the US market in 2004. In these two

years the company did not launch any new product. From Table 4 it is quite clear that the

company has not been able to launch any product patent in the regulated market. Now let us

take a look at the Indian market. Table 5 shows that the company has been able to file patents

every year but all of them are process patents. Here it needs to be mentioned that the figures

below indicate the number of patents filed in the respective years. But the company has not

revealed information on the number of patents secured in the year 2006. This is because after


2005 the Patents Act was amended and the government response to the patents filed in the

year 2006 is still awaited.

Table 5

Patents filed in India

Year 2001 2002 2003 2004 2005 2006 2007 2008

Number of

patents filed

22 29 50 30 10 200 204 150

(Source: http://www.wockhardtin.com/)

Hence the argument put forward by the company employees that the company has not been

able to manufacture any product-patented medicine turns out to be true.

Table 6

R&D Expenditure of the company

Year 2000 2001 2002 2003 2004 2005 2006 2007

R&D Expenditure (Rs. in millions) 316 360 428 469 529 598 512 355


Graph 1

R&D Expenditure

360.6

468.61

529.29

597.5

512.08

316

428

0

100

200

300

400

500

600

700

2000 2001 2002 2003 2004 2005 2006

Year

Rs

. in m

illio

n

Table 6 shows the R&D expenditure pattern of the company over the years. The pattern has

been graphically shown in Graph 1. The R&D expenditure of the company has increased over

the years but has come down for the years 2006 and 2007. Looking at the achievements of the

company in the development of insulin injecting devices like Wosulin cartridge and Wosulin

Pens, the company’s R&D efforts cannot be ignored completely. However, the company can

afford to invest even more as its profits are increasing.

Sales Analysis of the firm

An analysis of the sales of the company in the past few years has been made. Following are

the findings of the study-



Table 7

Sales and Profit trend of the company

Year 2000 2001 2002 2003 2004 2005 2006 2007

Sales for the year

(Rs. in millions)

5585 6494 7658 7416 8955 10092 11586 12520

Profit before tax

(Rs. in millions)

770 1086 1194 1460 2404 2654 2526 2731


Graph 2

Graph 2 and Table 7 show the sales revenue and the profits before tax earned by the company

over the years. They show that the company has been successful in increasing its sales and

profits over the years. However what is important to know is that whether this increase in

sales and revenue is a result of the acquisitions made by the company or are they the result of

the natural growth of the company. For this I made an analysis of the sales of the company

outside India and compared it with sales of the company in India. Graph 3 and Table 8

highlight this. The figures down show that the sales in India have remained almost the same

throughout the period but the sales in regulated markets have increased tremendously. The

company’s focus has shifted from domestic sales to USA and Europe.

Table 8

Sales Trend in India and USA

Year 2002 2003 2004 2005 2006 2007

Sales in India (Rs. in

millions)

5160 4568 3555 3768 4533 3631

Sales in USA and

Europe(Rs. in millions)

1326 1818 4509 4947 5902 8013


Sales and Profit Trend of Wockhardt

0

2000

4000

6000

8000

10000

12000

14000

2000 2001 2002 2003 2004 2005 2006

Year

Am

ou

nt

(Rs

. in

mil

lio

ns)

Total sales for the year Profit before Tax


Graph 3

Sales trend in India and USA

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

2002 2003 2004 2005 2006

Ye a r

Rs. in

millio

n

India USA/Europe

The division of US and European sales and that of sales in India could not be made available

for the years prior to 2002, hence have not been shown. This is because the company made its

first major acquisition abroad in 2003 by acquiring CP Pharmaceuticals. Before that foreign

sales formed only a meager portion of the total sales of the company. This is very much clear

from Graph 3. The graph shows that there has been a phenomenal increase in the foreign

sales of the company post 2002. Further, the company employees were also interviewed over

this issue. During the primary survey a question was asked from the respondents about the

sales pattern of the company. The statement put forward to them was-Statement- Give your

comments on the performance of the company in terms of growth.

The respondents were asked their opinions on the general progress of the company. Here the

question that was asked was subjective. The respondents were asked to comment whether the

company’s journey from the year 2000 to 2007 has been a success or a failure. They were

also asked to cite examples in support of their views. Towards this not even a single

respondent said that the company is a failure. In fact each one of the respondent gave his own

views citing why the company was a success. Most of the respondents said that the increase

in sales year after year was an indication of the success of the company. Few said that the

company’s ability to acquire other companies in US and Europe in quick succession was an

indication of the financial soundness of the company. During the primary data collection, I

visited the company’s regional office in Delhi from where I gathered the following relevant

data-

Table 9

Wockhardt India Business vs. Indian pharmaceutical business

Year Indian pharmaceutical Industry business Wockhardt India Business

2004 7% 13%

2005 9% 10%

2006 18% 28%

2007 13% 15%

(Source: Company office, Delhi; data collected by ORG IMS )


Table 9 shows that Wockhardt has been performing better if compared to the overall growth

of the Indian pharmaceutical industry. Each year the company has been growing at a rate

higher than the industry’s average rate.

Now let us find out how far the company has been successful in utilizing its funds using ratio

analysis. For this purpose, two ratios have been used

Return on Equity Shareholders Funds

Return on Capital Employed


Return on Equity Shareholders Funds = Profits available to equity shareholders

Equity shareholders funds

Here,

Profits available to equity shareholders = Net Profits after Interest, Taxes and Preference

Dividend.

Equity shareholders funds = Equity share capital, Reserves and Surplus, Share premium,

P&L Account Balance – Accumulated losses, if any.

Table 10

Trend Analysis of Return on Equity Shareholders Funds Particulars 2000 2001 2002 2003 2004 2005 2006 2007

Return on Equity

Shareholders Funds (%)

30.8 32.1 31.2 29.49 36.5 32.7 25.56 23.97

Graph 4

Trend Analysis of Return on Equity Shareholders Funds

0

10

20

30

40

2000 2001 2002 2003 2004 2005 2006 2007

Year

Fig

ure

s i

n

%


The trend can be seen from the above table and graph. The ratio has started declining after

2004. Hence the company needs to take look at the above position. Although the sales and

profits are increasing but the benefit is not being transferred to the shareholders.


Return on Capital Employed = Net Profit before Interest and Taxes

Average Capital Employed


Here,

Capital Employed = Equity shareholders funds + Preference share capital + Long term debt +

deferred taxes + Minority interests.

Average Capital Employed = Opening Capital + Closing Capital

2

Table 11

Trend Analysis of Return on Capital Employed

Particulars 2000 2001 2002 2003 2004 2005 2006 2007

Return on Capital

Employed (%)

20 28.9 32.13 24.2 20.6 17.52 17.19 14.5

Graph 5

There is an initial increase in the ratio. However, after 2002 there is a slump in the ratio. This

is due to the fact that although profits before interest and taxes increased, but the capital

employed by the company increased tremendously from 2003 onwards. The following points

are important:

During the financial year 2003-2004, the company made a bonus issue of 36332002 shares at

Rs. 5 each.

During the financial year 2004-2005, Wockhardt launched its maiden Foreign Currency

Convertible Bond issue of US $ 100 million with a Greenshoe option of US $ 10 million. The

company used the proceeds of the issue for funding its acquisitions in Europe.

The decrease in both the ratios is the impact of acquisitions done by the company. As a result,

the capital has increased more than the profits. The company should either try to reduce the

capital employed or invest it in a more reasonable manner. This shall help it to improve both

the above ratios

0 5

10 15 20 25 30 35

2000 2001 2002 2003 2004 2005 2006 2007

Fig

ure

s in

%

Year

Trend Analysis of Return on Capital Employed



FINDINGS

The study has the following main findings-

The main reason for acquisitions abroad, is establishing a foothold in the foreign markets.

Regulated markets offer a huge opportunity for sale of generic drugs. The study shows that

Indian companies do not want to waste their time in establishing themselves in the foreign

market. To simplify they are simply acquiring already established companies in regulated

markets.

During the course of study it was found that Indian companies have not been successful in

launching product-patented drugs. To establish themselves in the foreign markets they do not

have any patented drugs. Hence they are acquiring companies that have product patents so

that they have products to sell.

The study also shows that acquisitions by Wockhardt were prompted either by the need to

gain control over the manufacturing facilities or to gain access to technological know-how as

in the case of Dumex India Ltd. Indian companies are using the manufacturing units abroad

so as to avoid setting up their own units. This may be because they do not want to get

entangled into the regulatory hurdles. Wockhardt acquired companies that had manufacturing

units approved by legal authorities like MHA of UK and USFDA.

A careful study of the ratios- Return on shareholders funds and return on capital employed

shows that the capital invested by the firm is more than what is required. Due to this, there is

a falling trend in these ratios despite the sales and profits increasing each year.

SUGGESTIONS

The sample company Wockhardt can be taken as a good example in the Indian

pharmaceutical industry as to how inorganic growth can be used to its best. Wockhardt has

leveraged the acquisitions method to its best. From being almost non-existent in Europe to

being ranked amongst the top 10 most profitable companies of Europe and that too in a span

of just 8 years is a great achievement. The study thus aims to suggest that acquisitions can be

used as a means of growth for firms that do not want to waste their time in establishing

themselves through organic methods. However here it needs to be mentioned that apart from

doing acquisitions Wockhardt has been working at the R&D forum also. The company has

been able to achieve some initial breakthroughs like discovering Wosulin, Asia’s first

recombinant insulin or establishing the R&D laboratory, which is India’s largest bio-

pharmaceutical laboratory. The company has been doing all this to establish itself in the

Indian market and to support its inorganic growth. Hence the study also suggests that apart

from adopting the acquisitions mode pharmaceutical companies should also focus on

strengthening their basic roots i.e. their R&D. Had it not been the case Wockhardt would not

have invested so much in its R&D. Further the capital employed by the company in the

business is more in proportion to the profits being earned. For this, either the company should

reduce the amount of capital or try to invest it in a better way so that the profits earned out of

it are even more.


CONCLUSIONS

The above analysis is based on the case study of a pharmaceutical company Wockhardt. The

company has acquired established companies in Europe at a very fast pace in the recent past.

The main effort has been to establish itself in the European market. Wockhardt was a

profitable company before 2000 also. It could have established itself in the European market

without these acquisitions also but that would have taken much time. It seems that the

company did not want to miss out the opportunities in the regulated markets. Hence it took

the shorter route. It adopted the acquisitions method and funded all the acquisitions through

its retained earnings and profits. Through the acquisitions the company has been able to

position itself amongst the top 10 companies in UK market whereas it did not have any

position before 2000. This shows that the company’s strategy of acquiring other companies in

regulated markets has been a success.

REFERENCES

1. Business World, November 2007

2. Rankings by Indian pharmaceutical Producer’s organisation, 2008

3. Annual Reports of Wockhardt-2000-2007

4. IMS Data

5. Indian Industry: A Monthly Review, Centre for Monitoring Indian Economy. Various

Issues, 2003-2004.

6. Prowess Database Center for Monitoring Indian Economy, 2002-2003.

7. “Potential and Emerging Opportunities in Biotechnology”,2004, 4-5 February,

Confederation of Indian Industry (CII) Conference, New Delhi, India.

8. “17th National Conference on In-house R&D in Industry, 2007, 10-11 November,

Department of Scientific and industrial Research, New Delhi, India.

9. http:// www.ims_global./com.

10. www.wockhardtin.com

11. Financial data for the year 2008 could not be incorporated as the same had not been

released by the company by the time the report was being written.

***

http://www.ims_global./com


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