Torrent Pharma to pay Rs 3,600 crore for Unichem's branded business

Torrent Pharmaceuticals on Friday pulled off its fifth acquisition in four years, buying Mumbai-headquartered Unichem Laboratories’ portfolio of 120 brands in India and Nepal, and a manufacturing facility in Sikkim, for Rs 3,600 crore on a slump-sale basis. Torrent will fund the acquisition through internal accruals and bank borrowings. 

Unichem's domestic formulations business recorded revenues of Rs 856 crore in financial year 2016-17, and accounted for over 60 per cent of the company’s revenue. At Rs 3,600 crore, Torrent is paying 4.2 times its revenue for this acquisition.  Unichem's market capitalisation stood at Rs 2,848 crore based on its stock price of Rs 313.30 on the BSE on Friday. 

Analysts said the valuation was justified as the Ahmedabad-based drugmaker was likely to manage Unichem’s domestic branded business better and grow it significantly. 

Deepak Malik, an analyst with Edelweiss, said Unichem’s molecules were old and hence they were growing at a slow rate. “The margins from the domestic business of Unichem draw 15-20 per cent. Torrent is likely to do more justice to the Unichem portfolio. It has already doubled the turnover from the Elder portfolio, which it had acquired,” Malik said. 

Analysts also said Torrent had a conservative approach and looked for healthy cash flows in potential targets. Unichem’s strong domestic portfolio fits well into that strategy.  

The deal not only strengthens Torrent’s position in the chronic therapies segment (chronic segment refers to therapies for diseases like cardiovascular, anti-diabetes, anti-depressants, anti-cancers, etc), but also de-risks from the slump in Torrent’s US operations.  The deal will catapult Torrent to fifth place in the Indian pharma market in the IMS Health rankings and eighth in AIOCD AWACS’. The company’s overall market share in terms of sales will grow from 2.3 per cent now to 3.2 per cent in the IMS. 

The acquisition will add a brand of Rs 100 crore and three brands of more than Rs 50 crore, according to the AIOCD AWACS database, to Torrent’s portfolio.

Top brands from the Unichem deal include Losar (cardiovascular), Unienzyme (gastrointestinal), Ampoxin (anti-infective), Telsar (anti-hypertension), and Vizylac (probiotic). 

Unichem is a synergic fit for Torrent in terms of portfolios -- Torrent draws around 29 per cent of its domestic revenues from the cardiovascular segment followed by neurology (16.8 per cent), gastrointestinal (15.5 per cent) and vitamins and minerals (14 per cent) segments. 

“The transaction is a strategic fit for Torrent and will strengthen its position in the key segments of cardiology, diabetology, gastrointestinals and CNS (central nervous system) therapies. It is also expected to realise cost and revenue synergies in Torrent’s branded business in India,” said Samir Mehta, chairman, Torrent Pharmaceuticals. 

Further, around 60 per cent of Unichem's domestic business comes from chronic therapies, which is a regular revenue stream for pharma firms. Torrent currently draws its 55 per cent revenue in domestic business from the chronic segment which is expected to jump to 60 per cent after the acquisition. 

Around 2,000 medical representatives will get added to Torrent’s existing field force, plus another 2,000 Unichem stockists would strengthen Torrent's distribution reach. But, one of the most significant benefits lies in how strengthening the domestic focus helps Torrent to de-risk the overall business in the medium-to-long term. 

Torrent’s US business has been volatile in the recent past. US revenue, which had soared 220 per cent in FY16, dipped 49.6 per cent during 2016-17, and its share in the company’s overall revenue fell from 40 per cent last year to 21 per cent in FY17. The US was a drag on Torrent's financials. For the full year 2016-17, Torrent Pharma's profit after tax (PAT) was down 46 per cent to Rs 934 crore, while its Ebitda (earnings before interest, taxes, depreciation and amortization) was down 46 per cent to Rs 1,596 crore. The revenues for FY17 stood at Rs 5,857 crore, down 12 per cent. Meanwhile, its domestic business grew 8 per cent. 

What will Unichem do? 

The 73-year-old Unichem Laboratories has been on the block for some time now. News about the promoters wanting to sell Unichem's domestic business has been doing the rounds for the past three years or so. Names of some of the top pharma players in the world, including Mylan, Abbott, Sanofi, Teva and even Pfizer, have been tossed around. 

Unichem’s stock price had hit a 52-week high of Rs 338.6 a share earlier this week on reports that Torrent was in advanced stages of talks to buy its domestic business. 

After the deal, Unichem plans to focus more on its international business comprising manufacturing, selling and marketing of fixed dosage formulation and active pharmaceutical ingredients (API). It plans to use the proceeds into research and development to build a future product pipeline. 

Prakash Mody, chairman of Unichem Laboratories, said, “The deal will enable the organisation to deliver superior results in areas of innovative research, new chemical and biological entities and move into the next orbit of growth. Torrent, we believe, is the right company as they have the expertise and right presence in the key therapies to take forward these established brands to newer heights.”