We want to focus on small drugs

Interview: Habil F Khorakiwala, chairman and founder CEO, Wockhardt group

FC Businessman of the year 2012, Habil F Khorakiwala is a man, who has seen death squarely in the eye and won. An ex-president of the Ficci, Khorakiwala was almost written off when Wockhardt racked up derivative losses greater than its net worth and stock price decimated. Cut to today, and Wockhardt that derives 80 per cent of its revenues from global markets, is now back in the reckoning. The group’s hospital business had shrunk to a sliver after sale of key hospitals to Fortis. But next year it will inaugurate a super specialty 320-bed hospital in Mumbai. Yassir A Pitalwalla met up with the 70-year-old Khorakiwala to talk about his journey. Excerpts:

You hail from a trading family (the founders of Akbarallys department store). What prompted you to get into manufacturing?

I never got into the family business. I was with Worli Chemical Works, as it was then called, right from the start after graduating at the age of 23. So for me, it wasn’t so much of a shift, instead it was building it up brick by brick.

There were a lot of firsts for me with this business, with our first manufacturing plant outside Mumbai in Aurangabad, going public after liberalisation, going for a GDR issue, international acquisitions and the focus on research, starting with biotech in 1997, and drug discovery research in 1997. In the 90s we did our first acquisition of Wallis Laboratories (a manufacturer and distributor of OTC drugs) in the UK for $9 million.

In 2000, we were still an Indian company with 90 per cent of revenues coming from here. Today, after four acquisitions in Europe and one in the US, we are a global company. Now we have built up our research capabilities, and have developed a global mindset with global practices of doing business such as transparency. Our managers now understand international business

What prompted you to diversify into hospitals?

We were in the pharmaceutical business and in the nutrition business too. We knew the customers and we knew doctors and the issues they faced. We studied the service industry and ran through that mindset for a while before we opened our first hospital.

Experts say your downfall was contributed in no small part by your acquisitions.

We have had a history of acquisitions from early days. When we acquired Merind from the Tatas it was half our size. At that time we got in McKinsey to help us with the integration and advise us. That’s when we realised we should not try to integrate two different companies.

Our primary focus in every acquisition thereafter is applying this yardstick of how better value will be created rather than a focus on integration. That’s why 95 per cent of the companies we acquire continue to be managed by locals. In fact, across our acquisitions, a total of less than 10 people would have been sent from India. We understand that cultures are different and laws are different.

All our acquisitions except our French one (Negma in 2007 for $265 million) have been successful. Our French acquisition had a patented brand and it lost the patent. We have restructured this business by transferring the manufacturing assets and people to a local party 18 months ago. The field force is now down to 60 from total staff strength of 480. This team does around $25-30 million of sales every year, selling a wide range of drugs and we plan on retaining this setup.

In the UK, the company we acquired was doing £15 million worth of annual sales. Today seven to eight years later it’s at £110 million. Our Morton Grove acquisition in the US for $38 million now does sales of $120 million. All our acquisitions were money-losing companies when we acquired them.

Our fall was caused by the derivatives we had.

Our debt-to-equity ratio had reached a high of 5.2:1 and the financial commitments were draining our operations. That’s when we went to corporate debt restructuring cell to get our loan restructured as all the cash generated from operations was going into paying off losses on derivatives.

Take us through the CDR process.

The CDR package mandated that we settle all derivatives transactions for not more than 25 per cent of the value, if this was to be paid in cash. Else, this was to be converted into redeemable preference shares maturing in 2018. While SBI, which was part of the CDR team opted for the preference shares, the foreign banks only wanted cash.

We were sanctioned Rs 500 crore loan to settle the derivatives liability and take care of FCCB issues. We used the help of A V Rajwade noted forex expert and a Singapore-based firm to document the fairness or otherwise of these derivative transactions. I also hired the counsel of Hari L Mundra (ex-CFO of the RPG group) to help me with the CDR process.

We also sold our animal health division for Rs 170 crore while our German acquisition Esparma (purchase price $11 million) was sold for Rs 120 crore. Our European loans got an extended repayment schedule, but this was not part of our CDR package, as this was lent by overseas banks.

How did you react to the challenges?

In 2008 our business was strong, but our operations have become even better since. Our people managed the limited liquidity at our disposal quite well. Operating costs were reduced from 41 per cent of sales to between 27 and 28 per cent of sales in three years. A reduction of operating cost by almost a third is quite impressive. The senior management team responded to the challenge by looking at all our costs. In terms of our organisational structure we had five levels and we reduced that to four. Our manufacturing cost came down by 30 per cent while our total people cost declined as a percentage of sales.

How were you able to retain people in the face of such dire circumstances?

I think our people felt confident in the leadership and believed that there was nothing wrong with the company, and that we had the capacity to come out. Through the downturn also, we stood focused on research and did not take any shortcuts and continued to invest. This gave a positive signal to the organisation that the company expects to do better in the future and hence is investing in R&D.

Our people managed their affairs as if it was their own organisation. People responded in their own manner and on their own. Things happen when a large number of people respond positively. I think this is due to the level of relations that we have built with our people over the years. There was self belief and belief in the organisation. People actively participated creatively. We didn’t hire any new people for some time. With the normal 10-12 per cent attrition this means people learnt to manage with fewer staff.

Our suppliers accepted longer credit terms and continued supplies. This is because we don’t have a transactional relation with them. That is the Wockhardt culture.

How were you able to sell the nutrition business to Danone for 2.7 times what Abbott agreed to pay you a year earlier?

At the time when we entered into the deal with Abbott Laboratories in 2009, there was a need to sell. But in 2010, when we struck the deal with Danone it was good to sell. It was not part of our core business, so I wanted to sell it to a strategic buyer who would value the business. With bondholders obstructing the sale to Abbott that deal had to be called off. Then we ran a process and shortlisted 10 to 12 parties.

I asked the prospective buyers to convince me that they were a strategic buyer to get to the due diligence stage. I didn’t deal with intermediaries and dealt directly with the head office of the firms. This is a very unique asset as there’s no other Indian company available to give an entry into this business for anyone who wants to enter India. It’s a very solid business comprising sales force, manufacturing, brands and others. We sold it between 7-8 times sales and 32 times ebitda.

You have now applied to exit CDR?

Yes the Rs 850 crore worth of term loans and working capital loans extended as part of the CDR will get repriced. The promoters’ shares, which are pledged with banks will be released. This will be a big benefit as there is a negative perception with some people feeling that we have borrowed against the shares for our private needs, not realising that the pledge was part of the CDR terms.

Through this downturn the revenue break up by way of geography too has altered dramatically.

Yes. Europe, which used to account for 45-50 per cent of sales in 2008, now accounts for around 25 per cent. While our business in the UK has grown by double-digits, the business in France collapsed and hence the total figure has declined. India’s contribution to sales has fallen from about 32 per cent to around 25 per cent. Our US business that was over 40 per cent of sales has got to grow, and we are also focusing R&D on the US launches. The US is the most competitive pharma market in the world. For the next several years based on our portfolio of drugs we expect the US to account for 45-50 per cent of our revenues.

Now that you are back decisively in the black, will we see a return of acquisitions?

We are increasing our R&D spend by 2-3 percentage points of sales. We want to focus on technology and innovation.

We have a base of 169 approved patents. For the past four consecutive years, we have been getting awards from Pharmexcil for the number of patents granted. We are now making 150 patent filings a year, in the process, creating a bank of intellectual property. We are focusing on technologies where we see a small window of opportunity and then develop our organisational capability to grasp this. Products and technology is our focus to drive value creation rather than pure scientific research. We want to focus on small drugs with revenues not exceeding $250 million or so that are difficult to synthesise, as such candidates do not attract attention from the big firms. So, the price erosion when generic competition sets in, too is limited. There is no point in chasing a $5 billion opportunity where the price drops 99 per cent when it goes off patent due to a profusion of generic firms targeting the opportunity.

What do you want to achieve over the next few years?

We want every associate of ours to focus on value creation not on an activity or a job. In the last 10 years we have gone from being an Indian company to a global one. In the next decade we want to grow through technology and research and drive growth and get products to launch in the US and Europe. We do not plan to demerge our R&D set up, because that is core to our business.

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