Wockhardt Buys Merind

In its search for a strategic fit, Wockhardt has succeeded in acquiring Merind. The market reaction saw the scrips of both Wockhardt and Merind zooming up by 17 per cent and 50 per cent respectively from their pre-acquisition levels. The gain obviously has been higher for Merind because the acquisition price has come under scrutiny. At Rs 260 a share, Merind is costing Rs 46.8 crore to Wockhardt initially and a total of Rs 93.6 crore if it acquires 100 per cent of Merind at the same price. The outflow is immaterial for the zero interest, cash rich Wockhardt which has earmarked Rs 200 crore for acquisitions. But the fact that the price is 44 per cent higher than what KPMG-Peat Marwick valued Merind at, is the dissonant factor.

 

Wockhardt also acquired Wallis Laboratories, UK for Rs 72 crore around the same time. So, in a span of a week, the company has managed to grow 100 percent through two acquistions by investing Rs 165 crore. The Merind purchase could however have been done at Rs 29 crore less, assuming the price per share to be Rs 180. This money if saved could have gone into some other acquisition and further boosted Wockhardts prospects. In effect, the shareholders of Merind stand to gain Rs 29 crore more, while the shareholders of Wockhardt have probably lost out on the same amount. It is yet to be seen whether the deal is a high cost low benefit one or a win-win game.

Wockhardt is a multi-product company with its main focus on formulations which contribute around 46.8 per cent. Diagnos-tics, agro-products and diet foods contribute around 17 per cent, while domestic intravenous fluids and bulk drugs account for 24 per cent of the sales. In bulk drugs, its star export product, Captopril, an anti-hypertension drug is facing severe competition from the time it has gone off-patent in 1996. However, its export business has gone up by 71 per cent in 1996-97 (22 per cent of sales) constituting largely dextropropo-xyphene, dextrometh-orphan and captopril.

This year, the margins are expected to be better with the depreciation of the rupee. The net foreign exchange earned last year has been around Rs 18.85 crore. Parenterals business being high volume, low margin business, have logically seen a dent in margins. The silver lining for this business however, has been the diffusion of competition in Core Healthcare. In formulations, it has some very strong brands like Pelox, Spasmo-Proxyvon, Pro-xyvon and Zedex.

Merind on the other hand has a limited product portfolio, with a virtual monopoly in Vitamin B12. Although the product is out of DPCO, the competition in the vitamin formulations market has put pressure on realisations. The other areas like corticosteroids particularly dexamethasone and gentamycin-based injectibles are under DPCO, hence affecting margins. The other areas include amitryptilline based anti-depressants, Tryptomer and Libotryp, and Practin (appetite stimulant and an anti-histamine). Its recent foray into anti-Parkinson and tranquilisers has broadened its portfolio.

The net effect would be synergy and broadening of Wockhardts product portfolio. Although, many of Merinds brands are under DPCO, Vitamin B12 is its one strong area which is expected to make the difference in terms of volumes. Tata Pharmas anti-malarial and anti-TB drugs will only serve to enhance its export base. Thus, its exposure in the therapeutic categories will go up from 29 per cent to 42 per cent and the combined turnover will push up to Rs 675 crore. This would include the sales of Wallis, which has analgesics, cold relief products, dental and stomach remedies, notably the OTC brands.

The story does not end with the turnover going up alone. Walliss acquisition implies a turnover to investment ratio of 1.9, while that of Merind is 1.5 (assumption: turnover of Merind Rs 140 crore and Wallis Rs135 crore). In terms of profitability, Merind is definitely less profitable than Wockhardt, contrarily, Wallis will contribute to valuable foreign exchange. This does not necessarily imply that the Merind acquistion can be written off as an overvalued one.

How Wockhardt draws the strengths of the company for its future investments will finally determine the value to the company and to the shareholders. Merind for its own, has shown a major improvement over last years performance and hence is very much in the reckoning.

Wockhardts half yearly results have shown a significant improvement considering the fact that the other income has gone down by 26 per cent. This has been suitably compensated by 25 per cent growth in operating income. The GDR proceeds had been invested in real estate and other securities which had given it a very high other income of Rs 15.4 crore in 1996-97. Since then it has been decreasing, so the sales are now showing a healthy trend. However, the net profit has gone up by 15 per cent only with respect to the growth in sales and this could be attributed to the drop in other income. An assumptive study has been done on the combined entity (see Half yearly performance), but whether the merger will immediately come into effect is yet to be finalised.

Wockhardts objective to achieve the Rs 1000 crore turnover mark seems to be closer with these acquisitions. The jump in market share will be from 1.4 per cent to 2.3 per cent. It is basically the threat of WTO looming large which has made most Indian pharma companies to acquire and grow, since organic growth cannot provide the minimum size required for market competitiveness.

So, Wockhardts effort is a conscious strategy to increase its strength in high value areas of formulations in the domestic market and bulks in the export market. Merinds contribution to formulations will be to the tune of Rs 90 crore and this will push up the formulations contribution to 51.5 per cent to the Wockhardt-Merind combine. For, the shareholders, it is time to expect more lucrative returns from the company. Stay invested. Merind at Rs 230 is touching the acquisition price and investors can look at divesting.