Pharma firms struggle with debt overload

While India's sixth largest drug maker, Wockhardt, is struggling to pay off its debt of over Rs 3,400 crore (Rs 34 billion), at least half-a-dozen other Indian drug makers' balance sheets are under stress due to debt, losses on foreign currency borrowings, acquisitions and changes in market conditions.

Dr Reddy's Laboratories, Jubilant Organosys, Orchid Chemicals, Aurobindo Pharma and Shasun Chemicals and Drugs are among those who have borrowed either to expand locally or to acquire companies abroad, but are now struggling to repay the dues, analysts say.

Some of the companies' debt now exceeds their market capitalisation, as local and global investors sold stocks on concerns over slowdown and falling revenues.

A few drug makers may be forced to sell assets to repay debt. Wockhardt is in talks with suitors to sell its acquired subsidiaries, including a part of Wockhardt Hospital.

"Highly leveraged Indian companies which grew through costly acquisitions may have to sell assets to bring down the burden, as many of these acquisitions are not giving the expected returns," said Sujay Shetty, head of life sciences, PricewaterhouseCoopers.

Dr Reddy's Laboratories, India's largest drug maker, which acquired Betapharm AG in 2006 for euro 480 million, or over Rs 3,200 crore (Rs 32 billion), has earned a mere Rs 800 crore (Rs 8 billion) in each of the past two years. The acquisition failed to yield the desired results and was further hit by a drastic change in the German drug selling system.

While Dr Reddy's total debt climbed to Rs 2,500 crore (Rs 25 billion) in the fiscal year ended March 2007, and dropped to Rs 1,968 crore (Rs 19.68 billion) in March 2008, its revenue dropped Rs 1,500 crore (Rs 15 billion) in March 2008 to Rs 5,000 crore (Rs 50 billion). Profit nearly halved in the period from Rs 932.7 crore (Rs 9.33 billion) to Rs 467.8 crore (Rs 4.86 billion).

Dr Reddy's was also forced to take a one-time hit of Rs 236.1 crore (Rs 2.36 billion) for writing down intangibles at Betapharm. A company spokesperson declined comment on a questionnaire, as top officials were travelling abroad.

Another of Dr Reddy's acquired facilities, CPS Mexico, the largest overseas manufacturing site of the company, was also in trouble due to problems in securing raw material. Dr Reddy's earned less from CPS last year and had to set up a manufacturing facility in Hyderabad to address the issue.

Chennai-based Orchid Chemicals is faced with the prospect of foreign exchange losses on its overseas loans of $154 million. This is after the part buyback of its FCCB (foreign currency convertible bonds) borrowings.

"Rupee deprecation will also impact the mark-to-market losses for companies with foreign currency loans and FCCBs on the books. Companies that would be impacted by translational losses due to FCCBs include Ranbaxy, Wockhardt and Orchid Chemicals," said a recent Angel Broking analysis.

Orchid, facing competition for its Cephalosporin products in the US, slipped into the red in the third quarter of this year. It had earlier invested heavily to create capacities in four new product groups, besides Cephalosporins, which contribute 90 per cent of revenues.

Orchid's market capitalisation slid from a 52-week high of Rs 2,324.5 crore (Rs 23.25 billion) to Rs 595.92 crore (Rs 5.96 billion, as of April 6), while total debt as of March 31, 2008, remained at Rs 1,970.54 crore (Rs 19.71 billion). The debt is expected to have dropped to Rs 1,750 crore (Rs 17.5 billion) by March 2009.

"With a debt-equity ratio of 3.2:1, our focus in the coming years will be to reduce it to half. We will achieve this through additional revenues from new product launches, especially in Europe, this year. We are going to launch more new products other than Cephalosporins and all our capex plans for the next four-five years have been completed," said Ch Ram, spokesperson for Orchid.

Shasun, which also posted losses in the last quarter due to forex losses, had a debt of Rs 256.6 crore (Rs 2.57 billion) as of March 2008. However, its current market capitalisation is a mere Rs 65.7 crore (Rs 657 million). The company also had issues with acquired facilities in the UK and had to recently shut an unviable plant, retrenching over 80 employees.

Contract manufacturing specialist Jubilant Organosys borrowed $310 million to acquire the Canadian radiopharmaceuticals and contract manufacturing company, Draxis Health Inc, and US-based Hollister Stier Labs for $378 million.

Jubilant's debt on the book as of March 31, 2008, was Rs 2,108 crore (Rs 21.08 billion), including $192.1 mn worth of FCCBs.

The company reported a loss of Rs 88 crore (Rs 880 million) in the third quarter, mainly triggered by a foreign exchange loss of Rs 131 crore (Rs 1.31 billion). It had losses of Rs 62.4 crore (Rs 624 million) in the second quarter.

R Shankaraiah, chief financial officer of the company, had earlier said Jubilant would look at more buyback and open market transactions.

Aurobindo Pharma, which recently entered into a large manufacturing contract with Pfizer Inc to assure lumpsum milestone payments in future, still has $205 mn worth of FCCBs outstanding. The total debt of the company for 2007-08 was Rs 1,847 crore (Rs 18.47 billion). Its market capitalisation is presently about Rs 1,021 crore (Rs 10.21 billion), down from Rs 1,935 crore (Rs 19.35 billion) over the past year.