The core requirements of each of these businesses - capital, technology,distribution strength - are diverse and just for that reason, marketperception has been poor, the reason being, when most of its peers are purepharma companies, Wockhardt was a mix of high-growth and low-growthbusinesses. While Dr Reddy's Lab and Ranbaxy were enjoying a P/E multiple ofmore than 80, that of Wockhardt was hovering below 50. In order to improveshareholder value, the company went in for restructuring, with McKinsey asconsultants, a few months back.

McKinsey recommendations
The major recommendation was to split the company into two for bettervaluation for the shareholders. The rationale behind this vertical split isthe drag of the large asset base of the non-pharma business or the lifesciences business, which was bringing down returns on networth. Thedisparity in asset utilisation ratios can be gauged from the fact thataround 80% of the earnings (before interest and depreciation) of the oldcompany were from the pharma division which has less than 35% of the totalassets. Hence, the split makes a lot of sense. Company officials feel thatROCE from the current levels of around 11% will move up to more than 30% fortheir Pharma division while for life sciences division ROCE will go down to6%.

Thus, though company officials assert that the life sciences business willbe the fastest grower in future, currently, it is the main reason forWockhardt's RONW being just 11% (annualised) against 20% of its peer group.The reason for this large variation, as stated above, is due to massiveamounts of real estate assets in the books of the life sciences division.These assets are a drag on the profitability of the company, but may becomemoney-spinners over a period of time. Moreover, industry experts feel growthrate of life sciences division will be more than 25%- 30% for the next 3-4years while Pharma division is expected to grow at a lower rate of around20%. However, the company has set an internal target of industry plus 5%growth rate for the pharma division.

The company has also taken care to reduce tax incidence in the mergerprocess. The finance Act 1999 has made mergers tax-neutral for capitalgains, but the company still has to pay stamp duty for the assets transfer.Incidentally, Maharashtra, where the company is located, has one of thehighest stamp duties in India.

Process of demerger
The process of demerger is done as follows: The old company Wockhardt Ltd isrenamed Wockhardt Life Sciences and is listed in B group. The demergedentity with Pharma business is now named Wockhardt Ltd and is listed in Agroup. This way, the company, informed sources say, has saved Rs 30 crore instamp duties because the transfer of assets of the life sciences divisionwould have increased outflow for the company in the form of stamp duty.

Other recommendations
As part of the recommendations, Wockhardt had earlier acquired Merind(formerly a part of Mercke Sharpe & Dohme - one of the world's largestPharma conglomerates) for Rs 100 crore from the Tatas as part of theconsolidation in the pharma business. Since the product profiles of Merindand Wockhardt were complementary to each other, the assimilation process wassmooth. Moreover, Wockhardt now could make use of Merind's strong marketingnetwork. The biggest gain for Wockhardt, through this acquisition, is theVitmin B12 capacity. Currently, Wockhardt is the only producer of B12 inIndia and one of the largest producers in Asia.

Business of demerged entities
The agri-sciences business, parentals and hospital business are transferredto Wockhardt life sciences division while Pharaceuticals will stay withWockhardt Ltd. Interestingly, only 25% of the turnover of the combinedentity is from the life sciences division.

Agrisciences contributed 10%, parentals 10% and hospital business chipped in5% of the combined entities turnover. The common functions like projectsdivision will be handled by life sciences. Finance and R&D divisions will beunder the control of Wockhardt and life sciences will outsource thesefunctions from Wockhardt. Out of 4000 employees, only 33% will go toWockhardt Life sciences.

Products
Pharma division of Wockhardt is in the business of manufacturingformulations (80%) and bulk drugs (20%). It exports just 20% of itsproduction mostly, bulk drugs to US, South Africa, UK and other Europeannations. In the domestic market, Wockhardt holds Number 2 position inproduction of Dextropropoxyphene, Dextromethorphan and captopril while it isnumber three in Vitamin B-12.

It competes with international drug majors in almost all segments. Thecompany has received ANDA (Abbreviated New Drug Application) approval forNiacin, Captopril and Rinitidine and has filed one more for Enalapril. Theseapprovals are bound to bring long-term revenues to the company in thepost-patent regime.

Agrisciences division manufactures biological growth promoters andbiopesticides. The division, with an expected growth rate of more than 25%is currently in top 25 in India.

The low margin high volume parental business of the company is the onlyprofit making parental manufacturer in India. It has 25% market share and isexpected to grow at 8-10% per annum. Another major thrust area of thecompany is hospital division. Currently it has super specialty cardiachospital in Bangalore and another in Calcutta for renal problems. It plansto built five more super specialty ones in the next three years in A gradecities.

Share-holding pattern
The shareholders of the combined entity get one share of Wockhardt and oneshare of Wockhardt life sciences. The promoters currently hold 65.6% stakein the company while public hold just 14% of the paid-up capital. Thispattern will hold good for the demerged entities as well on the day of thedemerger.