Wockhardt - A story with twist and turn

Stock Opportunities
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Please also read transcript carefully and the interview to moneycontrol today
He said -

a) we should be able to resolve in next 15 days that means we will reply and the balance in next few months, maximum two-three months
b) in dialogue with the US regulator to sort out earlier 483 observations made on its plants, he said, adding that he expected some issues to get resolved in the coming months.
c) Waluj establishment inspection report (EIR) has come ‘few months’ back and cannot confirm when withdrawal alert will be receieved. It is not in comppliance with UK and no plans to supply from here to UK

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Booking loss is always an option and often best option if things go wrong after you bought on borrowed conviction.

New drugs/NCEs are moonshots with very low probability of success especially for indian companies so i accord zero value to these 4 drugs in my investment thesis for wockhardt .if it comes through it will be bonus.

Also , if urine on floor was the only problem at wockhardt , it probably wont have got a warning letter much less a import alert that takes 3 longs years to address! . if you want to dabble in US focused pharma companies , try and understand what invokes USFDA’s ire and what actually leads to import alerts rather than just 483s and observations .

Try building your conviction on whats working at wockhardt,factors like Good growth in domestic market , Recovery in UK/europe sales in coming quarters and possiblity of lifting of import alerts , Solid manufacturing capablities across solid dosage,injectables,creams/ointments,biosimilars etc in multiple geographies, Well established front-end in US/Europe, improving odds of USFDA resolutions and ofcourse relative discount to peers.

if you are not able to convince on these points better to switch to stocks which have corrected similarly and don’t have short/medium term overhangs like MPS for example which had a vicious fall (not recommending MPS).plus Dont rely on tweets from guys like anirudh sethi to base your investment decisions.

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One most important point to note in the conversation of Mr. Khorakiwala with CNBC TV18 on Tue Jan 19th Link attached below

This is the first time he is giving specific timeline to resolve Shendra issues.A man as reticent as Mr. Khorakiwala, this confirmation means he is very sure. In the past, he was always evasive when asked about how much time it will take to resolve FDA issue and his standard answer of “couple of more quarters”. Also Walunj plant which was under import ban has already started supplies to US is a ** Breaking News** which somehow got buried in the noise.

I feel (and hope :smirk:) that quota of bad news is getting over. Time to turn the page is here…

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Very much agree to the views shared by you. Perhaps current price is factoring ZERO US business and gives the cushion for limited downside. I hope the patience pays off handsomely as upside triggers seem very huge if and when materialize.

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From Waluj , They are only supplying Enalapril Maleate which has been exempted from import alert . i think the transcript doesn’t match what he says verbally exactly.

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Source: CNBC TV

Data deletion issues @ Shendra

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ET Now has accessed USFDA form 483 issued to Shendra plant. They scanned entire 483 form. No data integrity issue noted. Procedural issues only. Tone not as harsh as Waluj or Chikhalthana observations. Following are the observations -

  1. Appropriate Controls not exercised over computers
  2. Written production, process controls not documented
    3.Aseptic area deficient regarding monitoring envirnonment conditions
  3. Procedures to prevent contamination not established
  4. Complaint records deficient as do not include findings of follow up
    6.Routine checking of Mechanical Equipment not as per written programme
    7.Procedures describing warehousing of drug products not followed
  5. Employees engaged in packaging of drug product lack training
  6. Equipment not suitably located to facilitate operations for intended use

I believe these are arranged as per levels of importance. Hence top 4 would be crucial and may take 3-6 months to resolve.

Please see attached link

http://economictimes.indiatimes.com/et-now/corporate/wockhardt-shendra-form-483-exclusive-details/videoshow/50752357.cms

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Another take on observations received by Wockhardt for its Shendra facility

FDA finds Indian drug maker Wockhardt hid failed tests
http://in.reuters.com/article/us-wockhardt-fda-report-idINKCN0V62CY

Indian drugmaker Wockhardt hid the results of failed tests and deleted data from its systems at a plant in western India, according to a report by the U.S. Food and Drug Administration sent to the company earlier this month and seen by Reuters.

Issues around “data integrity”, maintaining accurate and consistent databases, are key to the U.S. watchdog, which regulates the world’s largest market for generics producers.

In the report, dated Jan. 12, the FDA said that among other violations, the audit showed that the results of 22 failed tests had not been recorded. It also found multiple data files had been deleted from some machines.

FDA inspectors also reported finding pharmaceutical ingredients that were not stored or labeled properly. A rejected drug batch was stored in the “approved material” area, and some batches did not carry expiry dates, the report said.

Reuters obtained a copy of the FDA report through the Freedom of Information Act, which allows the public to ask for the disclosure of unreleased information.

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Can anyone following Wockhardt throw some light on whats the problem with the company; since the stock price has almost corrected from Rs 1700 to 1000.

Currently stock is trading at very attractive valuations. Is it good time to enter the stock

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Please see the news item
"Wockhardt Limited has informed the Exchange that on February 23, 2016, Khorakiwala Holdings and Investments Private Limited, Promoter Group Company, have acquired 43,233,260 Non-Convertible Cumulative Redeemable Preference Shares ( NCCRPS ) and 18,528,540 Optionally Convertible Cumulative Redeemable Preference Shares (OCCRPS) of the Company for an amount aggregating to Rs. 9,26,42,700 and Rs. 26,75,13,694 respectively.Further, that as the ratio of conversion of OCCRPS into equity shares is dependent on the price to be calculated on the Relevant Date, which is future date, it is not possible to ascertain the number of equity shares to be allotted on conversion. Hence, the paid up equity capital of the company and % of total share capital after the conversion of OCCRPS into equity shares is not ascertainable."

Can somebody help me understand whether it could be considered as good news for Wockhardt? Also what I am struggling is whether “acquired” means purchased from market or issued fresh preference shares to the promoters by the company? If so, what does it mean for minority shareholders? Some senior valuepickrs can throw some light on this.

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Further to my post above, I read that the company has declared to BSE that these preference shares were purchased from a bank. So this clearly looks positive, particularly acquisition of optionally convertible cumulative redeemable preference shares, since that will push up promoter stake in the company after conversion.

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Promoter’s stake is already around 75% , it can’t be pushed up any further . My guess is these securities are from the days when wockhardt was under CDR and khorakhiwalas have bought them back from banks now.

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I think promoter stake is 74.19% as of now. So there is some leeway to take it to 75%. Having said that, I think you are right about why these were with bank in first place.

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Another interview from Mr. Khorakiwala. Waluj approval looks on the horizon

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I used to have a position in Wockhardt but exited. I dont think the promoters can be trusted completely - he may not be lying but he does not tell the truth always.

  • they arbitrarily do con calls - maybe only when there is good news to share. Does not want to take uncomfortable questions. TV anchors are relatively benign. Why no con calls last two Q
  • Since last several concalls Aug analysts tried to ask him to quantify the UK opportunity but no clear answer was given. Now that they produce a poor result he comes up with the figures for one time opportunity . When the eps was 10 bucks he said they will be able to maintain this run rate. Maybe because the UK operations had started and they expected US approvals to kick in too. Now the EPS has halved and we know the run rate he will be able to maintain (ex one off) and at this run rate and current market scenario it’s not really a cheap stock.Dont think Shendra is going to get approvals this year given the nine observations they earned. Waluj wont get them too far. In the meantime several of their ANDAs will have rotten.
  • Last they came on TV it was for the fourth QIDP. With the results we come to know they now have 5 QIDP. Not sure why wasnt the fifth one disclosed. Nobody really knows what the market opportunity or timeline is for these drugs but research costs will go thru the roof as we are already seeing.

Dont think Khoraki or his son are really hands on given the way they handle the concalls and given their quality track record. His son should have taken over but dont think he is as capable as the father. I hope they realize this and bring in someone else to take over. Its not a business any idiot can run.

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I agree that Wockhardt does not rate high on corporate governance. Khorakiwala likes to keep things close to his heart and does not want to disclose a lot of things. This is clearly bad news for minority investors. Having said that, I don’t think the owners are dis-honest. My sources tells me that Mr. Khorakiwala is a person who takes more pride in his R&D capabilities while may not be paying enough attention to other parts of his business like manufacturing. This is hurting company pretty badly in past 2 years. I hope he learns from that and pays more attention to so called boring business of manufacturing (so he may be thinking).

But on positive side, he is not reducing R&D spend to prop us EPS and stock price (which tells me he is not in the game of stock price manipulation). Also Wockhardt believes in organic growth, so he is not buying growth. This gives me confidence that once they turn corner, it could turn out to be a winner. But it may test your patience!

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There is nothing wrong with promoters , it a good buy if things improve.

I was just going trough the balance sheet . There are lot of preference shares due to CDR

Optionally Convertible
Cumulative Redeemable
Preference shares of ` 5/- each
fully paid up: 121,454,927
These will be converted by Dec 2018 .

Non-Convertible Cumulative
Redeemable Preference shares
of ` 5/- each fully paid up:475,659,941

redeemable at a premium of 20% of the face value along with cumulative dividend on March 31, 2019.

Have not understood if these will converted back to shares or money will be paid with 20% of face value .i.e. Rs 5

Total shares outstanding at present is 111 Million

Basically EPS does not present the right picture at the moment.

i was trying to find some value but this structure makes wockhart expensive.

FY 15 : EPS 36 - 4049/111

Preference share dilution = EPS 17 - 232 million shares PE 57

worst case nonconv also diluted : EPS 5 PE 194

current PE ration becomes PE 57 assumes dilution of all shares which is not the case i think

. I was exploring it as value buy but i guess need to pass and move to evaluating IPCA

Can any one guide me about below taken from Wockhart. It will be useful for educational purpose to evaluate if CDR works for Banks more than companies

@hitesh2710 , @Donald
…
(i) 121,454,927 (Previous Year – 121,454,927) 0.01% Optionally Convertible Cumulative Redeemable Preference shares (OCCRPS
Series 2) issued bilaterally to various Banks, on the following terms and conditions:
The Preference Share holders shall have the right to convert OCCRPS Series 2 along with accumulated dividend, into fully
paid equity shares of the Company, in one or more tranches, commencing July 4, 2016 till December 31, 2018, at conversion
price as per the then applicable SEBI formula on the date of conversion. The said shares, in case not converted, shall get
redeemed along with accumulated dividend on December 31, 2018 without any redemption premium.
(ii) 32,265,110 (Previous Year – 32,265,110) 0.01% Non-Convertible Cumulative Redeemable Preference shares (NCRPS Series 2),
redeemable at a premium of 20% of the face value along with cumulative dividend on December 31, 2018.
(iii) 283,394,831 (Previous Year – 283,394,831) 0.01% Non-Convertible Cumulative Redeemable Preference shares (NCRPS Series
3) issued bilaterally to various Banks, redeemable at a redemption premium calculated at 4% p.a. on simple basis along with
cumulative dividend on December 31, 2018.
(iv) 160,000,000 (Previous Year – 160,000,000) 0.01% Non-Convertible Cumulative Redeemable Preference shares (NCRPS Series 5),
redeemable at a premium of 20% of the face value along with cumulative dividend on March 31, 2019.

…

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I am also struggling with the same thing.If OPCCRPS -due for conversion b/w 4th July 2016 to 31st Dec 2018(121,454,927 nos).
If converted in Equity than there will be a huge dilution of EPS.As i calculated with TTM net profit. EPS will come down to around 14.

But market is still valuing it at the PE of 34. it should be around 12.

Notice some good thing from Mr.Khorakiwala that he aquired 18,528,540 OPCCRPS but still 102,926,387 are held by banks.I dont know what he want to do with that.My be he will convert them later to delay the dilution.
But that is for sure, huge dilution is coming soon in July this year.

I think @suvendurath can help.Picture is not clear :slightly_smiling:

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Dear Avdesh
Let me try, not following Wockhardt.
Part I you asked about dilution of EPS.
Don’t know from where you are checking the PE number, it’s maddeningly unhelpful number available on internet portal simply because some one takes forward, some one trailing, for some last quarter, for other five quarters etc.
Absolutely, if Pref Shares get converted to Equity there will be additional owners. EPS will get automatically adjusted.
Part II Number of shares that may come for dilution
Conversion from Pref Share to Equity is not a straight forward process. Convene a broad meeting, inform the stock exchange, intimate back to stock exchange with solution and then issue share certificates within 2 month.
Now the tricker part is pricing, the pricing works like take over code…basis a relevant date. As relevant date is future, they will not be able to tell you now.

Why a promoter goes for convertible options is preference shares are not part of take over code. This means theoretically you can buy a company with more than 50% share, but preference shares are not part of that 50%. Easier for promoter to breathe and collect money.
Regarding bank holding- u mean to say pledged? Then obviously you know what bank can do.

Issues can be bit different if it has gone through CDR, I don’t know…asking you. In recent days lot of guys handed a bounty of pref shares as part of debt restructuring plan.

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@suvendurath Thanks for Explaining.

see attachment for the History of preference shares in wockhardt from 2010.Preference share.xlsx (30.1 KB)

1).If you see in 2013 some OPCCRPS got redeemed.(while their due date was oct 2015 -dec 2018).How is this possible(I dont have much knowledge in Company Law Act)?

2).If this was happened to save the dilution it can happen in future also before July this year(due date of OPCCRPS series 2 ,due date is July 2106-Dec 2018).

Pardon me for my stupid questions as i am new to the value investing.