Stock Fundamentals

Torrent Pharma: Good medicine

Nalinakanthi V | Updated on January 13, 2018 Published on February 25, 2017



Healthy product pipeline and geographically well-diversified business are positives

Even as the Sensex recorded double-digit return over the past year, many pharma stocks underperformed the broad market. The weakness has been on two counts. First, concerns over regulatory tightening and action by the US regulator — the Food and Drug Administration. Next, growth slowdown in the US on account of regulatory action and competition-led price erosion.

Companies with a good product pipeline and geographically well-diversified business may be better placed to weather this. Torrent Pharma has a strong presence in branded generic markets — India and Brazil and other regulated markets such as Germany besides the US.

The sharp correction of nearly 25 per cent in the stock price over the last six months was largely on account of erosion in the price of generic version of anti-depressant Abilify. Growth pick-up in the domestic market, coupled with steady growth in markets such as Brazil and Germany, should more than compensate for the slow growth in the US.

At the current price, the stock trades at about 17 times its 2017-18 estimated earnings. Though this is broadly in line with its historical average of 16-18 times in the last 2-3 years, a pick-up in the earnings led by higher utilisation at its Dahej facility (Gujarat) for the US and healthy growth in India and Brazil should keep the stock buoyant. Investors with a two to three-year horizon can consider buying at current levels.

Boosting R&D focus

The share of the US, which accounted for about 40 per cent of the company’s revenue in 2015-16, almost halved during the first nine months of the year.

This was on two counts — sharp fall in the realisation of generic Abilify and limited launches in the US. To address this, the company is strengthening its research and development (R&D) capabilities by adding 500 more people to its team. The company currently has an R&D team of over 550 people.

Torrent’s R&D spend is being stepped up from 3 per cent of revenue in 2015-16 to 7 per cent in 2016-17. The company is targeting at least 20 new product filings every year for the US market. The focus areas for its new products have been identified as oncology, dermatology and ophthalmology.

Though delay in launch of generic versions of drugs Renvela and Renagel, used to reduce phosphorous in patients with kidney disorder, is a sentiment dampener, ramp up in production at its Dahej facility should support growth in the US market.

The facility at Dahej has over eight products approved and commencement of production at the facility should help revenue and operating profit margin improvement.

In the interim, strong growth in India, Brazil and Germany should support revenue and profit growth.

For instance, field force restructuring in the home market has been completed. It has already rationalised discounts and bonus units given to channel partners.

This should help improvement in the operating margin for the company’s domestic business.

Also, the pay-offs from integration of its acquisition of the branded business of Elder Pharma (in 2013) and manufacturing unit of Glochem Industries (in June 2016) should aid growth in the near term. During the April-December 2016 period, Torrent’s India revenue grew 9 per cent y-o-y. Likewise, growth in Brazil and Germany remained strong at 25 per cent and 19 per cent, respectively, during the same period.

Torrent’s consolidated revenue declined 15 per cent for the nine-month period ended December 2016, largely due to a 51 per cent decline in the US, given the tapering of exclusive sales of generic Abilify.

Given the absence of high margin revenue from the US, Torrent’s net profit halved to ₹775 crore during the same period.

Published on February 25, 2017

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