Cash ban, Brexit weigh heavy; expect normalcy in Q4: Wockhardt

Indian pharmaceutical company Wockhardt reported a subdued set of third quarter earnings where it had a loss of Rs 53.90 crore against a profit of Rs 72 crore last year and its revenue also dipped 7.35 percent to Rs 995.60 crore year-on-year (YoY).

Speaking to CNBC-TV18, Habil Khorakiwala, Founder, Chairman and CEO of Wockhardt said that due to demonetisation and the translational loss in pound due to Brexit, it will be weak earnings this quarter.

He said that pre-demonetisation the company's growth was at around 10-12 percent and slipped to 4-5 percent due to the cash ban and expects it to come back to normal levels in the last quarter of this fiscal.Below is the verbatim transcript of Habil Khorakiwala’s interview to Latha Venkatesh, Anuj Singhal, and Sonia Shenoy on CNBC-TV18. Anuj: Exceptionally weak quarter for you, what went wrong because your margin is down to just 2 percent and you have reported a net loss as well? A: I think this is partly impact of demonetisation and also Brexit because we had a significant UK business and the translation loss in pound is there even though the local currency that is in pound our business has grown up. Also, they said there is some impact on the remediation cost which is sitting into our expenses. Latha: People will buy drugs if they need, I don’t know if demonetisation will be an impact – you have to buy, you have to buy. In any case pharmacies were actually taking currency notes. So, I am not able to understand your demonetisation argument. Also, I wanted to know if you had to spend on the remediation costs that you referred to, how much were they? A: As far as the demonetisation is concerned, we were running up to first six months of growth of about 12 percent. Currently it is about 4-5 percent. So, in the current quarter it should come back to normal; that is one. We have been spending something of the order of USD 10-12 million a year. Sonia: It is this uncertainty about the data integrity remediation timeline that has actually worried the street quite a bit. Can you give us any indication of when the remediation measures could be put through and any clarity on that? A: We are in dialogue with the US FDA and we have agreed on way forward in very clear terms -- exactly what is required. So, we are in that process and we hope that -- and what we have decided to do one plant at a time, and we hope that in next three to four quarters, we should see the light at the end of the long tunnel. Latha: Why should margins fall, even if your volume of sales fell, margins have fallen rather drastically? What were the reasons? A: One of the thing is that we have taken one time Dextropropoxyphene an inventory we were carrying and we have written off to the extent of RS 12 crore of that and that has affected margin by about 2 percent. Sonia: You said that in three to four quarters you hope to see some of the resolution as far as remediation’s are concerned, can you give us exactly what the status is with the FDA on Waluj as well as on Chikalthana? A: There is no change in status because after last inspection we are in remediation process actually. Latha: Finance costs also have risen, why and will they remain as elevated as that, about Rs 60-62 crore a quarter? A: If you look at it, we are carrying some cash on the balance sheet. So, if you adjust the finance cost along with the income, it is lower number actually. More or less it would be on the same level because we bought some funding done in last two to three months and we are not able to invest it during that short period of time. However, by and large, net will remain more or less the same. Sonia: BY when can we expect products from Shendra, Waluj, and Chikalthana to sell into the US markets again, will it be in the second half of say FY18 or would we have to wait longer than that? A: What will happen in FY18 will be that we are outsourcing some of our product to some of our existing ANDA and we could see some business coming out of that in FY18. Latha: When is the next FDA inspection? A: We don’t know but I don’t think it will be there for next two to three quarters. Latha: Your R&D costs are at 10 percent of sales, where exactly are you investing in research and development? A: There are two areas, one is normal R&D which we are actually cutting down in pharmaceutical, but part of our R&D is also invested in our clinical trials. Sonia: Your India business this time has fallen quite a bit but last quarter it was good because you had many launches. How much do you expect the India business to fall in the subsequent quarters as well? A: No, I don’t think it will fall. We will go back to 10-12 percent growth in the current quarter.