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In times of distress, it gets tough even for the best of companies to justify the existence, leave alone profitability, of their business operations. That seems to be the case with Wockhardt, one of the top 10 drug companies in India with a strong presence in key therapies in the local market, as also in Europe and the US.

Like in the case of Orchid Chemicals, a strong company in injectables whose share prices plunged many months ago due to certain payment defaults relating to stock market transactions, Wockhardt is now caught in its most difficult financial problem.
Orchid’s shares recovered later, but taking advantage of the crisis, a Ranbaxy group company moved in swiftly and cornered a substantial chunk of the company’s shares.

As for Wockhardt, it is difficult to believe that a company which could have assumed leadership through global business expansion has had to lean on ICICI Bank for debt restructuring.

As with any other ambitious Indian company, Wockhardt chairman Habil Khorakiwala wanted to grow by tapping opportunities in the emerging generic markets. Wockhardt bought Pinewood, a generic company in Ireland, for $150 million to have a strong front-end.

As for products, it had acquired two companies, CP Pharma and Wallis, many years ago. Later, Wockhardt put $265 million more and acquired Negma Labs and claimed to have become the first Indian company to have rights of patented drugs in developed markets.

Wockhardt quickly grew its revenue from Europe to over $400 million, the largest for any Indian company. That was not enough. Wockhardt had also to buy in the US to have a sizeable presence in the global generics space. At a price of $38 million, Morton Grove came handy and all seemed fine with the strategy.

Wockhardt officials may have charted out a plan to derive cost benefits, move easier products into India, cut the flab in operations of these units and increase its gains in steps. But even before the benefits of these operations could concretise, the financial markets across the world started cracking in the second half of 2008.

The timing couldn’t have been worse for Wockhardt.

The company borrowed heavily and spent nearly $450 million for the three buyouts, but its revenues grew by less than $300 million.

To further aggravate the debt crisis, it issued foreign currency convertible bonds (FCCBs) worth $108 million through overseas listings. That was done with the anticipation that Wockhardt’s share price would reach a level where the bond holders will convert into shares or redemption could give them an exit from their holdings.

But that was not to be. Wockhardt’s crisis reached a menacing level. Its total debt, including the FCCB payments, is reportedly pegged at Rs 3,700 crore and no amount of internal operational optimisation could take care of this mammoth liability.

As per information communicated to the shareholders, Wockhardt has now taken shelter under a corporate debt restructuring plan approved by the Reserve Bank of India. It may sound simplistic, but it is not going to be a very easy task. The bankers, in return of their much needed funding to help Wockhardt wade through the current tricky situation, may try to mould the company in their own way, interfere in key management issues and this could complicate the problems further. But who knows, sense may prevail and Wockhardt management may still have its say.

Among other plans, Wockhardt is also scouting for strategic partners as well as looking at divesting some of its operations. That may include Pinewood, Negma or even its German business Esparma. While that may bring only part of the funds required to be serviced, the company can do the best only through a methodical turnaround where working capital is managed well and operational efficiencies are absolutely maximised.
Habil Khorakiwala is known to be among the veterans who helped lay a strong foundation for the Indian generic industry, but the big question most watchers are asking is whether his sons Huzaifa and Murthaza are ready to take on the baton from their illustrious father yet. Huzaifa has been made the executive director, while Murthaza will be the managing director of the company.

It is expected that Khorakiwala will continue to steer the business, but in times of crisis, small errors can snowball into big blunders. Wockhardt has been an exciting company and with the right moves, it might just be saved in the coming few months. An investment from some multinational company for a commensurate stake or part of a division is also not ruled out. It will be interesting to watch what happens next.