Buy Wockhardt; target of Rs 552: Sharekhan

Broking house, Sharekhan is bullish on Wockhardt and has recommended buy rating on the stock with a target of Rs 552.

Sharekhan report on Wockhardt:

Wockhardt has received the approval of the US Food and Drug Authority (US FDA) for marketing painkiller tablets, containing a combination of Dextropropoxyphene  napsylate and Acetaminophen (DPN+APAP), in the US market. The DPN+APAP combination is the generic version of Xanodyne Pharma's patented product, Darvocet- N. It is one of the more potent analgesic drugs and is widely used all over the world for control of various kinds of pain. 

Implication of drug approval 

The US market for the DPN+APAP combination is over $100 million. The product has  been off patent for years and so any significant price erosion is less likely. However  the market for the product is highly competitive, as there are about 14 players  including the innovator of the product. Wockhardt is the world's largest manufacturer  of Dextropropoxyphene and the company's products based on this drug are sold all  over the world. With this approval, it can launch the product in the USA soon. 

Assuming a 5% market share for Wockhardt and marginal price erosion, we estimate  this product to contribute Rs20.25 crore to Wockhardt's top line in FY2008E.  Wockhardt, with end-to-end integrated capabilities and own marketing front-end for the product, can generate a margin of 30%, leading to incremental earnings per  share (EPS) of just Rs0.50 per share. 

Valuation and view 

Wockhardt's US initiatives are progressively gaining momentum with the launch of every new product. It has now 16 ANDA approvals out of total fillings of 45. It is  planning to file additional 30+ ANDAs in the US markets during CY2007 and expects  at least seven new product approvals from the US FDA in H1CY2007. With this the company is targeting a growth of 50% plus in the US business in CY2007. 

Wockhardt plans to achieve domestic growth of at least 20% through its new product launches, entry into newer therapeutic areas like dermatology and oncology, and a  30% growth in the Dumex business. On the other hand, the Pinewood acquisition in Ireland would boost the European business. Also, Wockhardt is expected to be one of the few Indian companies to benefit from the opening up of the biogeneric space in the regulated markets like the USA and Europe. With legislations in the USA underway, we believe Wockhardt will be able to launch its biogeneric products in these markets in 2009-10. With limited competition in this segment, Wockhardt is expected to reap handsome gains. 

At the current market price of Rs362, the stock is available at 12.0x its estimated CY2007 and 10.4x its estimated CY2008 earnings, on a fully diluted basis. The valuations seem very attractive at these levels and should be viewed as a strong opportunity to get into the stock. We maintain our Buy recommendation on the stock with a price target of Rs 552.