Torrent Pharmaceuticals Ltd

Torrent Pharmaceuticals Ltd (Torrent Pharma), the flagship company of Torrent Group is the eighth largest pharma company in India with a strong position in various segments including Cardiovascular System (CVS), Central Nervous System (CNS), vitamins & minerals, Diabetology, Anti-infective, Pain Management, Gynaecology and Paediatric segments. The company has recently forayed into the therapeutic segments of Oncology and Rheumatology.

Torrent Pharma's competitive advantage stems from world-class manufacturing facilities, advanced R&D capabilities, extensive domestic network and a widespread global presence in over 40 countries.

The company has made a number of acquisitions to grow its business. It acquired Elder Pharma's Indian branded business in 2013, the Dermaceutical business of Zyg Pharma in 2015, API plant of Glochem Industries in 2016, women healthcare brands from Novartis and Unichem's Indian branded business along with its Sikkim Plant in 2017. These acquisitions have strengthened Torrent Pharma's position in the Indian Pharma market.

Torrent Pharma started making acquisitions in the international markets in 2005 with 90-year-old Heumann from Pfizer to enter the German market. Later, it purchased Abbreviated New Drug Application (ANDA) of Monocycline from Ranbaxy for the US Market in 2015.

In January 2018, Torrent also acquired Bio-Pharm, Inc. (BPI) a generic pharmaceuticals and OTC company based in Levittown Pennsylvania, USA, which also included a US FDA registered manufacturing facility.

Mr. Samir Mehta, who was Vice Chairman of Torrent Pharma since 2010, took over as Chairman from his elder brother, Sudhir Mehta, in 2014. He holds a Master’s Degree in Business Management and has been associated with the company since 1986. His other directorships include Torrent Power Ltd., Arvind Ltd., Torrent Private Ltd., Tornascent Care Institute and UNM Foundation. Under his leadership, Torrent Pharma took on various strategic initiatives, including entry into new therapies and geographies, making Torrent one of India’s fastest-growing pharma majors.

Mr. Ashok Modi, an integral part of the group, took over as CFO of Torrent Pharma in 2014. He was influential in Torrent Pharma’s acquisition of Zyg Pharma in May 2015.

Turnaround of Unichem acquisition:
After a period of weak growth till FY12, the company restructured its business and made a number of acquisitions including acquisition of Elder Pharma’s portfolio in Dec-13, Novartis’ brands in India in May-17 and Unichem’s branded business in Nov-17 to step up growth. The company successfully turned around Elder Pharma’s business resulting in higher sales, increasing market share and higher prescriber base. With respect to the recent acquisition of Unichem, Torrent Pharma’s track record of successful turnarounds of its acquisitions gives confidence of its ability to do the same with Unichem’s business.

The two companies have an overlap of prescription medicines to the extent of about 60-65%; however, Torrent Pharma will benefit from Unichem’s brands in segments including anti-hypertension in CVS, digestive enzymes in gastrointestinal, etc. Torrent will be a key beneficiary from Unichem’s popular OTC drug ‘Unienzyme’ the second largest brand in digestive enzymes. Unienzyme forms 5% of Unichem’s sales. Unichem’s key prescription brands include Losar (angiotensin II receptor; 20% of Unichem’s sales), Ampoxin (anti-infective, 7% of sales), Telsar (angiotensin II receptor; 6% of sales) and Vizylac (combination of Lactobacillus Sporogenes and vitamins; 3% of sales).

Strong Brand:
The company has strong brands under its portfolio. Some of the key brands and their revenues as on 31^st December 2017 are:

Manufacturing Facilities:
Torrent Pharma has six manufacturing facilities across India for domestic and international markets. The Sikkim formulations plant caters specifically to the domestic markets, while the facilities at Indrad and Dahej cater to the international markets. The facilities are approved by US Food and Drug Administration (USFDA), World Health Organization (WHO), Medicines and Healthcare products Regulatory Agency (MHRA), Therapeutic Goods Administration (TGA) and other global regulatory bodies.

Torrent Pharma has also added manufacturing capacity inorganically over the last two years. In May 2015, Torrent Pharma acquired a 100% stake in Zyg Pharma that included the derma manufacturing facility at Indore approved by various regulatory authorities, including USFDA. Torrent Pharma also acquired the API manufacturing unit at Vizag in June 2016 and some Drug Master Files (DMF) as a going concern on a slump sale basis from Glochem Industries. In January 2018, Torrent Pharma acquired Bio-Pharm, a generic and OTC drug maker in the U.S. The acquisition included a manufacturing facility in the U.S. that is approved by the USFDA.

Plant	Function	Output	Target location
Indrad	API & Formulations Plant	5.5bn tabs/caps & 45MT API	US/ EU/ Brazil
Dahej	API & Formulations Plant	7.5bn tabs/caps & 25MT API	US/ EU/ Brazil
Indore	Derma Formulations Plant	160mn tabs/caps	US/ EU/ Brazil
Baddi	Formulations Plant	4.4bn tabs/caps	EU/Brazil/RoW
Sikkim	Formulations Plant	3.6bn tabs/caps	India
Vizag	API	25MT API	US

API - Active Pharmaceutical Ingredient; MT – Metric Tonnes; Tabs – Tablets; Caps – Capsules

Investment in R&D:
During 2017-2018, the company invested about Rs. 460 crores on R&D, equivalent to 7.6% of revenue. For the second year in a row, Torrent Pharma maintained double digit filings in the US. The company made 16 filings in 2016-2017 and filed 13 ANDAs in 2017-2018. The company currently has 46 ANDAs under review of the USFDA. 40 of these products will be launched at Torrent Pharma while six will be sold by the company’s partners affiliated to the company through its acquisition of Bio-Pharma; in these partnering deals, the company will receive a share of the profits.

The company has also received tentative approvals for 5 products. For 2018-2019 going forward, the company expects to file between 15 to 20 ANDAs and to receive about 8 to 10 approvals. All these products are expected to be launched as per the set schedule. The company has streamlined its product portfolio and made the necessary adjustments to adapt to the changes in US market conditions.

Key market and growth strategies ahead:
India: The company’s growth in financial year 2017-18 has been better than the overall pharma market growth. Brands like Shelcal, Losar, Nexpro, Chymoral, Nebicard, Deplatt, Azulix, etc. have been contributing significantly to the India business sales and strengthening the company’s standing in therapies like Cardiology, Gastrointestinal, Vitamins and Diabetes. Regestrone, which was acquired from Novartis AG in May 2017, has registered growth of 22% compared to molecule growth of 8%. Two of the new launches in the financial year 2017-18 viz. Shelcal XT and Pruvict have featured amongst the top 10 new launches in the Indian pharma market.

The company fosters excellence through innovation supported by robust R&D capabilities. Significant resources are being allocated to strengthen the new product pipeline. The company has a strong pipeline of molecules, which will further augment its growth in the next five years and provide competitive edge across the key therapeutic areas.

US: The USFDA is on track to meet its objectives as outlined in the Generic Drug User Fee Act I. This will result in a larger number of generic approvals in a shorter duration thus further accentuating the competitive pressures in the US generic market.

Torrent is ranked No. 10 amongst the US generic Indian companies and has a market share of around 11% in its covered market. Revenues from US operations were Rs. 1,100 crores during the financial year 2017-18 as compared to Rs. 1,346 crores during the previous financial year showing a de-growth of 18% (constant currency de-growth of 15%) mainly due to price erosion in the generic market.

Given the future market moving towards complex products, Torrent is significantly ramping up its pipeline with products like Oralliquids, Ophthalmics, Ointments and Specialty (Oncology).

Brazil: Brazilian operations registered revenue of Rs. 709 crores with growth of 1% (constant currency 3%) over the previous year. The company intends to consolidate market share of its operations in these markets by focusing on growth in specialty areas, enhancing field force productivity and introducing new products. It also plans to achieve growth in such markets by further developing its relationships with customers and distribution network.

Among the Indian companies, in terms of market share, Torrent ranks No. 1. The company has 6 products under approval and has a development basket of 34 products. In terms of prescription share, Torrent is ranked at 14th and has gained 3 ranks over the last year.

The company has been building its portfolio in generics with parallel filings of branded generic products. It has approvals of 21 generic products and 24 branded generics.

Debt reduction in future:
We believe Torrent has shown its ability to make a success of its acquisitions even by taking leverage. In fact, the turnaround it achieved with respect to Elder has been speedy and successful. This has given investors confidence in the company's M&A strategies.

The Unichem acquisition increased leverage to ~1.17x at Mar-18; while this is higher than that of its peer group, it is comfortable due to Torrent's steady EBIDTA growth from its branded business and potential improvement in earnings from Unichem's assets. We expect Unichem's turnaround to help Torrent reduce leverage to <0.5x by Mar-21.