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. 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. We like the domestic growth story post Elder acquisition, but expect headwinds in Brazil and RoW (Rest of the World) to offset India. We await better entry points and initiate with REDUCE, 10% downside.
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. 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.
US scale-up has benefitted from select opportunities – lack of filings to curtail growth
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. 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. 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%. 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. 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.
Expect pressures on profitability from FY2017—REDUCE
We expect Torrent’s FY2016/17 growth to come under pressure, with cross currency headwinds (Brazilian Real) also adding to growth concerns. Torrent’s shares are currently trading at 25X and 22X FY2017/18 EPS respectively, at a modest 5% discount to front-line companies. 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. We value TRP at 19X FY2018 EPS at a discount to front-line peers, and initiate with a REDUCE recommendation, 10% downside.
Valuation: Reduce; with a target price of Rs 1,320
We initiate coverage on Torrent Pharma (TRP) with a Reduce recommendation and a target price of Rs 1,320. 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. 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.
US scale-up critical; domestic remains key driver
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. 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. Moving forward, following Abilify, Nexium and Detrol LA launches earlier this year, we see TRP’s growth profile highly leveraged to its success in the US market.
* We expect TRP’s base business in the US to grow at 19% CAGR from FY2015-18e. We do not see any significant launches until FY2019, in the absence of which, we expect overall US business to remain below $300m.
* We expect the growth rate of domestic formulations to accelerate to 17% CAGR from FY2015-18. Within the domestic formulations division, we expect the Elder portfolio to grow at 18%, while TRP’s core portfolio is expected to grow at a slightly lower growth rate.
* Europe/CEE growth in low-teens: We expect TRP’s German business to grow at 11% CAGR from FY2015-18 due to continuing pricing pressures while we expect the CEE (Centre for Environment and Education) business to grow at a faster 15% CAGR from FY2015-18.
* Given the sharp depreciation of the Brazilian Real, we expect TRP’s Latam revenues to be stable over FY2015-18, though we expect the Mexico business to grow rapidly at 25% CAGR over FY2015-18 given its low base and stronger approval pipeline due to shorter approval timelines.