Torrent Pharmaceutical Limited‟s (TRP) 2QFY18 results were slightly below EE owing to a topline miss due to one-offs in Brazil. However, a strong rebound in the domestic market came as a positive surprise. TRP is looking to further strengthen its domestic business by acquiring Unichem‟s portfolio for Rs 36bn. We think the acquisition is a good strategic fit in the backdrop of a challenging environment in the US, and believe the pay-back period would more than 8 years. On a pro-forma basis we believe acquisition will be earnings dilutive in the 1st year. We upgrade TRP to ADD with a Sep‟18 TP of Rs 1,394 derived by assigning 25x P/E (vs. 22x earlier) - higher owing to TRP‟s increasing focus on the domestic business.
US biz declines marginally qoq: The US business declined by Rs 170mn sequentially with revenues at Rs 2.55bn. TRP has approvals in place for five ANDAs, viz. gLuvox Cr (two generic players), gTribenzor (two generic players), gTwynsta, gLamictan Xr and gAgrylin, and expects to launch all of them over the next two quarters. Since most of these are small products, we expect US$ 3mn per ANDA from these launches. From a long-term perspective, the company remains optimistic on the US market, and stated its goal of clocking US$ 250mn in revenues, which would mainly be led by new launches. TRP has guided for four derma ANDA filings by fiscal-end, and reiterated its guidance of 10-15 ANDA filings per annum.
Domestic biz rebounds sharply with 22% growth: Domestic business grew 22% on a yoy basis and 27% yoy on a like-to-like basis (at gross level) mainly on account of post- GST restocking. TRP remains confident on its domestic biz; to strengthen its footprint, it has entered into a definite agreement with Unichem for acquiring its domestic portfolio for Rs 36bn. The acquisition would be consummated by Dec‟17.
Unichem acquisition a strategic fit: TRP is strong in cardiology/gastro/CNS therapies with market shares of 5.6%/3.1%/ 6.4%. With the Unichem portfolio acquisition, TRP‟s share in these therapies is set to increase to 3.2%/ 8.6%/3.9%/8.4%. The acquisition would also improve TRP‟s ranking in the cardio (from 16 to 8) and gastro (from 3 to 2) segments. Along with Unichem‟s portfolio, TRP would be taking over its field force (3,000) and new stockists (2,000).
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Synergies; low-hanging fruits to be plucked first: TRP stated that it sees synergies in revenues and costs from the acquisition over the coming period. We believe some of these synergies would be in the form of increase in drug prices, field force rationalization and improvement in sales-force productivity (Unichem‟s Rs. 0.27mn vs. TRP‟s Rs 0.72mn – sales force productivity). With this, TRP expects the acquisition to be cash-accretive from the first year and EPS accretive by third year.