Torrent Pharma: Strong base, robust outlook

Higher R&D spending and improving US pipeline to help keep growth rates healthy

Torrent Pharma has seen a series of brokerage upgrades, as new approvals and higher research & development (R&D) spends are expected to improve its US prospects, while higher exposure to India vis-à-vis peers should translate into better growth. While most pharmaceutical companies are raising their R&D spends, the increase is the highest for Torrent. It plans to raise its investments over FY16-18 by 55 per cent, with R&D as a percentage of sales expected to rise to eight per cent in FY18, from under four per cent in FY16.

The rise in R&D spends should help the company address a weak US Abbreviated New Drug Application (ANDA) pipeline. The firm has also increased the ANDA filings and it expects to file 15-20 applications in FY17 (average of three over the past three financial years) and launch 10 products this year. The commissioning of its Dahej Special Economic Zone unit last year should help supply products to the regulated markets. Analysts at Credit Suisse say the Dahej plant helps address capacity constraints for the US and European Union.

The US has been a key growth driver, given its portfolio of high-growth products such as generic versions of Abilify (anti-psychotic), Detrol (urinary) and Nexium (acidity) where it has gained traction and market share. As a consequence, US sales were up 128 per cent year-on-year (y-o-y) in the March quarter. The base business also expanded. The primary reason for the strong y-o-y expansion of margins to 31.1 per cent has been the sales boost from these products.

The other key growth area has been India business, which grew 13 per cent in the March quarter, aided by sales from brands such as Shelcal and Chymoral. Given the 12 per cent-plus growth expected in the Indian pharmaceutical market and with the company expected to outperform the sector, expect the India business performance to be strong. Growth has been aided by the acquisition of Elder Pharma and Zyg Pharma. Despite the acquisitions, analysts at Edelweiss Securities say the company has best-in-class return ratios upwards of 30 per cent and rich cash flow.

Given the prospects both in the US and India, 80 per cent of the analysts tracking the stock have a ‘buy’ rating, with a consensus target price of Rs 1,620, which from the current levels, offers an upside of 18 per cent.