Formulations and contract manufacturing puts Wanbury on the growth trajectory.

Wanbury, the world's largest manufacturer of Metformin, an anti-diabetic drug, is eyeing the contract manufacturing space.

The company, which makes active pharmaceutical ingredients (API) for export markets and formulations for the domestic segment, expects contract manufacturing revenues to grow three-fold to Rs 30 crore in FY09. To move into new segments and diversify revenue streams, Wanbury has also adopted an inorganic strategy.

It has bought three companies---Pharmaceutical Products of India (PPIL), an active pharmaceutical intermediate (API) manufacturer in March, 2007, Doctors Organic Chemicals (DOCL), a bulk drugs player in April, 2007 and Cantabria of Spain, a formulations outfit in December, 2006---for a total consideration of Rs 300 crore. The company now has five plants, of which two are approved by the US FDA.

Inorganic impetusThese acquisitions have helped establish its presence in various product categories and markets. Wanbury's acquisition of DOCL, a company that makes anti-inflammatory products like ibuprofen and has a FDA approved plant, will enable it to expand the contract manufacturing business and open up the foreign regulated markets for its products.

New products and existing MNC clients such as Teva and Barr are expected to boost Wanbury's sales in this segment, which had revenues of Rs 10 crore in FY07.

While its acquisition of PPIL has added two API facilities and a formulation plant, Cantabria will help it to move up the value chain from API to finished product stage. In APIs, the company is expecting a growth of about 25 to 30 per cent over the next three years and targets revenues of Rs 350 to Rs 400 crore.

Formulation benefitsAnother area the company is focusing on is formulations. Its share is expected to grow from 33 per cent (Rs 47 crore) of revenues in FY2007 to 57 per cent (Rs 213 crore) in the FY2008 largely on the back of contribution from Cantabria. Cantabria is expected to contribute 66 per cent of total formulation sales and 38 per cent of total revenue for FY08.

The acquisition has given Wanbury a base to market their products in the European and the US regions. To improve operating margins at Cantabria, which are currently at 22 per cent, Wanbury has entered into a strategic alliance with Bravo Healthcare, an Indian API manufacturer.

This entails the upgradation of Bravo Healthcare's formulations plant. Wanbury owns 20 per cent in Bravo and intends to increase its stake, going forward. With UK MHRA approval expected by 2009 for this plant, Wanbury can market Bravo's products in Spain and other regulated European markets. The company expects to achieve sales growth of 15 per cent for its Spanish business.

ValuationsOf Rs 176 crore net sales for the six month period ended September, while the API business generated Rs 69 crore, the formulations business (including Cantabria) accounted for Rs 107 crore. Operating profit margins were the highest for the Cantabria unit at 27 per cent, while for APIs it was 19 per cent, and domestic formulations 16 per cent.

The company expects operating profit margins to be maintained at around 24 per cent, while net margins would be around 10.5 per cent. Going forward, revenues and net profit are expected to grow at 35 per cent annually, for the next two years.

At Rs 142 the stock discounts its FY09 earnings by 7 times. The stock has been trading at the 10-16 times P/E band for the last few years. And, if we are to apply the lower end of the multiple, the stock should be able to deliver over 30 per cent returns in a year's time.

Source : www.business-standard.com