Torrent Pharma Ltd

There have been phases in the Torrent journey (mostly pessimistic ones) for around 6 – 8 months. Most of the serious investors including sell side guys have been aware of Torrent’s thin product pipeline for US for quite a long time. But lets look at few of the issues over the past 4 – 5 months:

• Pre-gAbilify Launch: It was expected that gAbilify is going to be a hyper competitive molecule with biggies like Sun & Cadila (they still have tentative approval) expected to launch on Day 1 along with smaller players like Torrent & Alembic apart from other generic companies like Teva and Hetero. However, Sun & Cadila have still not been able to launch (most probably due to 483 issue). Torrent as we all know has surprised even the biggest optimists in terms of revenue and profits generated from Abilify during Q1 and Q2. Till date, there are just six generic players in the market and Torrent has been able to retain market share of around 9% share (as per latest Bloomberg data). As per the last concall, the pricing has reduced but its still around 15 – 20% of the innovator price. Post the stellar results, brokerages have raised concern how FY17 is expected to pan out. Going forward in FY17, lets assume more players enter and prices decline further to 5 -6% of the innovator price and assuming 9 – 10% market share given company has been able to maintain relationship with the existing retail chains (as indicated in the last concall), we can still expect them to do around USD 40 – 50 million sales from Abilify sales in worst case scenario given its still an at risk launch. The good thing about Torrent is that they have been able to successfully milk this big opportunity till date and generated healthy cash flows from it.
• Risk related to depreciation of Brazilian Real: This happened post the Q1 results post the downgrade in Brazil’s sovereign rating. As the company doesn’t disclose geography wise margins it is very difficult to gauge margins from Brazil business but as per few research reports they were pretty low every before the depreciation. The good thing, however, unlike their German business, is that it is still doing well on constant currency basis with 15 – 20% growth over the past few quarters.
• Approval of gDetrol and gNexium: The company has got approval for these to molecules much before many of us expected (I was expecting them to get approval for Nexium in December – January). They have been successfully able to get good market share in gDetrol with around 11% market share as per Bloomberg data. gNexium is a big molecule with still not much competition. Both these molecules are expected to drive their FY17 sales in the US market.
• Domestic market: The company is taking right steps in the domestic market like acquisition of Elder’s portfolio, rationalisation of the MRs and increasing their productivity, focussing on high growth segments etc. Their last concall post Q2 seem to be pretty bullish with the management targeting industry leader’s (Sun’s) margins. Although, such claims should be taken with lot of pinch of salt but it still shows management’s focus on improving margins.
• Future pipeline: For FY17, at least in the US markets a lot will depend on one major molecule – gCrestor. Its still a growing molecule with market size of more than USD 5 billion but has 10 tentative approval for generic players till date and is expected to be competitive. Apart from these one time opportunities, their base business is also doing well with company being market leader in few of these molecules. One thing we should keep a tap is their ANDA filings – Zero filing in H1FY16 is a concern but management has indicated that they intent to file 15 – 20 ANDAs from FY17 onwards and we should start seeing a glimpse of that from Q1FY17. They have started hiring scientists for R&D and have increased their R&D spent which is a step in right direction.
• Acquisition of ANDA portfolio/companies in domestic market or US: One thing became clear from the balance sheet as on September 30, 2015 and post the concall that company is building cash and not prepaying debt that they had taken for Elder acquisition. The management also indicated that they are evaluating various options in domestic as well as foreign markets (majorly US). There can be various opportunities which can crop up like few ANDAs post Teva – Allergan merger etc. The company had also acquired few molecules in the past post Sun – Ranbaxy merger. Management had indicated that they are pretty much prudent in terms of valuations and dont want to overpay.

I think as Hitesh bhai is saying we will need to show some patience here and give some time to management.