Over the past few years, TRP has increased its focus on the US market, which grew to $140m (18% of FY2015 revenues) from barely $6m in FY2010.
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Torrent Pharma is a mid-tier generics company with a significant presence in the domestic market (35% of FY2015 revenues), where it has a strong presence in the fast-growing chronic segment.
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US scale-up critical domestic remains key driver Our concerns over growth are reflected in our expectations of 15% EPS CAGR from FY2015-18, excluding the impact of Abilify and Nexium, though on reported numbers we expect FY2016 to be the peak year for TRP’s performance until FY2019. Our P/E multiple is at a discount to front-line peers (sector average of 21X FY2018 P/E), given our concerns over the sustainability of US growth, potential margin pressures due to cross-currency headwinds in RoW business and increase in R&D investments.
We initiate coverage on Torrent Pharma (TRP) with a Reduce recommendation and a target price of Rs 1,320. Valuation: Reduce with a target price of Rs 1,320 We value TRP at 19X FY2018 EPS at a discount to front-line peers, and initiate with a REDUCE recommendation, 10% downside. This is despite the weak US pipeline, which will significantly curtail its FY2016-18 growth, as we expect benefits of Zyg acquisition and recent R&D investments only to play out from FY2019/20 onwards. Torrent’s shares are currently trading at 25X and 22X FY2017/18 EPS respectively, at a modest 5% discount to front-line companies. We expect Torrent’s FY2016/17 growth to come under pressure, with cross currency headwinds (Brazilian Real) also adding to growth concerns. With only 18 ANDAs pending approval in the US, the bulk of which are likely to be significantly competitive, we expect TRP to report muted growth until FY2018 as we expect Zyg portfolio and TRP’s own recent efforts to expand its pipeline to only contribute from FY2019/20 onwards.Įxpect pressures on profitability from FY2017-REDUCE We expect Nexium to be limited to a $20-25m opportunity in FY2017, given our expectations of less than 10% market share due to manufacturing hurdles associated with the product. Nexium is widely expected to help offset the decline in Abilify, particularly given DRRD’s FDA issues, but our checks suggest that price erosion has now crossed 85%. However, competitive dynamics for Abilify are sharply deteriorating, with our checks suggesting over 90% price erosion post Apotex and Aurobindo’s launch earlier in the year. Post the windfall from Abilify and expected limited competition for Nexium, Torrent’s US sales will likely increase to ~$385m in FY2016, a near ten-fold increase from FY2012 US sales. Tata Consultancy Services, Tata Motors, Adani Ports, Vedanta, Tata Power, Bank of Baroda stocks in focus Given TRP’s lower base (market share: 2.4%), a higher proportion of sales from chronic therapies and the steady rate of new product launches, we expect it to continue to outperform market growth and project sales growth of 17% CAGR (compound annual growth rate) over FY2016-18. Proven record in domestic market, Elder portfolio to drive productivity gains: Post Elder acquisition, TRP’s field force has expanded to 5,000 representatives and we expect field force productivity to improve as Elder synergies start to contribute. We await better entry points and initiate with REDUCE, 10% downside. We like the domestic growth story post Elder acquisition, but expect headwinds in Brazil and RoW (Rest of the World) to offset India. However, with Abilify dynamics set to deteriorate, and only 18 ANDAs (Abbreviated New Drug Applications) pending approval in the US, we believe TRP will report muted performance until FY2018 and expect the benefits of R&D to be visible only from FY2019/20. Speed breakers ahead: Torrent Pharmaceuticals’s (TRP’s) shares have re-rated to 21X 1-year forward P/E (price-to-earnings ratio), thanks to near 10-fold increase in its US sales from FY2012-16e.
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