Torrent Pharma Ltd

[pikrohit]

Torrent pharma (CMP 1470) is a Formulations and API player that manufactures Branded Generics for India, Brazil and Phillipines, and Generic drugs for US, Germany and UK. Below information is mostly taken from AR FY15.

Revenue breakup-

1. Domestic market 35% revenues in FY15
   Torrent has a strong presence with focus and leadership in CVS and CNS segments. India business grew 39% in FY15. It is among the top 15 pharma companies in India, with 9 brands in top 500. It has one of the top 5 brands in cardio and CNS, and one of the top 10 in Neuraceuticals and Gastrointestinal. As per AR FY15, Torrent is growing fast in Derma, Pain and diabetes.

2. US market 18% revenues FY15
   Torrent is among top 3 players for 14 products in US. Management has indicated that they will target 15% market share in most of the US launches ahead. In FY15 it grew 7% on high base(Cymbalta 180 day exclusivity). Torrent got 6 ANDA approvals in FY15, taking total approvals to 53, including 5 tentative. 19 ANDAs are pending approval and 40 are under development. Torrent is ramping up complex products like ointments, injectables, oncology

3. Other branded markets (Brazil) 20% of revenues FY15
   Brazil pharma market expected to grow 14% till 2018. It grew 24% in Brazil currency terms in FY15. Torrent already has 40 approvals, and 20 are under approval. 2 approvals are expected in FY16. Brazil pipeline of 25 products in CVS/CNS category. Launching 9 more therapies including Derma and Gynac

4. Other generic markets (Germany) 21% revenues in FY15
   Torrent is ranked 6th generic player in Brazil with a share of 4.2%. Its Brazil business grew 8% and there is price erosion happening

5. Others/CRAMS 6% of revenues in FY15
   Major portion is manufacture of insulin for Novo Nordisk for their India needs.

Recent acquisitions-

1. Elder formulations business in India+Nepal strengthens its positioning further. Two of the acquired brands from Elder Pharma (calcium supplement Shelcal and analgesic Chymoral Forte) are the largest selling products for Torrent. They took a price hike of Elder products recently.
2. Zyg pharma- Dermatological formulations. I request Hitesh to give some insights about this.

Capacity expansion
Doubling capacity with new facility in Dahej. Started process of USFDA approval. Commercialization will happen in FY16. Sikkim expansion will be available after 2 years. Torrent is entering the Oncology segment and their plant is expected to be operational in next 2 years.

R&D
R&D as % of revenue is 4.8%. Torrent is working on several first time novel drug delivery. 467 NCE patents, 224 approved. Most advanced program on diabetes associated heart failure in Phase 2 clinical trials. Benefits derived as a result of the above R & D-
• At the end of the year under review, the Company received 6 ANDA approval and filed 73 ANDAs and 26 DMFs filed in US and 56 new product Dossiers & 24 DMF submitted in the EU.
• 818 patents filed for NDDS technology, drug discovery projects and innovative process of API & formulations for various geographies and 325 have been granted so far.
• New Discovery programmes in Chronic Obstructive Pulmonary Disease & inflammatory Bowel Disease has been initiated.

Other info

1. Field force increased by 1005 from 4062 in FY14
2. Promoter holding 71.3%. Managed by Samir Mehta, younger son of founder. Elder brother Sudhir Mehta stepped down and moved to Torrent Power. The transition began by 2009-2010 when Samir, who was the executive vice chairman, starting taking greater interest in the pharma business. Need to work more on understanding the management quality.
3. Dividend payout 25%
4. In FY15, long term debt increased from 921cr to 2421cr due to acquisition of formulations business of Elder for 2162cr. Working cap loan was 319cr. Cash=865cr. Cashflow from operations=810cr

Pipeline (I am working on this on lines of VP generic pharma thread. Will post soon)
Expected high impact launches in US

1. Abilify (unexpected low competition, launched in 1QFY16) Q1 results declared yesterday. US sales have gone up by 231%. Much of it can be attributed to Abilify. Full Q2 and one month in Q3 will form part of 180 days exclusivity period.
2. Nexium (expect approval anytime). API players-Auro, Cadila, Cipla, Orchid, Glenmark
3. Detrol (low competition, launch in mid 2015)
4. Exforge

Last year results

As per screener, last 5 year sales, profit CAGR and RoE are 20, 29 and 33% respectively.

I feel Torrent should do well in coming years, with its recent acquisitions, new launches and capacity expansion. The debt should also come down over next 2-3 years.

I will post more details in a few days.

Discl: Invested

[ankitgupta]

Hi Rohit,

gAbilify (Aripiprazole) does not have 180 day exclusivity and yesterday only Apotex has been given approval by USFDA to launch gAbilify. Link http://www.accessdata.fda.gov/scripts/cder/drugsatfda/index.cfm?fuseaction=Search.DrugDetails. Most of us including me misunderstood the exclusivity thing. Lets see how the competition pans out over the next few months

I have worked on Torrent’s pipeline and will share my views on it by eod.

Disclosure - Invested

[hitesh2710]

The two big triggers in torrent were

first the abilify launch and its windfall gains. That has now materialised and likely to continue for next quarter and beyond. I think in place of exclusivity for our purpose, we have to consider the term limited competition and this can potentially extend even beyond the 180 day period. Alembic AGM should provide better idea about the exclusivity thing bcos alembic has also got it in abilify.

Second was the integration of Elder portfolio into torrent and its impact on domestic growth front. That too has played out well in q1 results. This is a more sustainable advantage the co can enjoy.Elder’s Shelcal is a very strong brand in calcium supplements.

And with Dahej expansion nearing completion, Elder expense out of the way, co will have a couple of years of very strong cash flows aided by the windfall abilify gains and the other routine businesses.

Co has a stated div payout policy of 30%.

All in all it looks a limited downside moderate upside kind of play.

disc; Invested.

[pikrohit]

Thanks for the comments @hitesh2710. Do you have any insights into Zyg pharma products?

I forgot to mention that one can see an increased depreciation/amortization of 190 cr compared to 87cr last year. This was because of intangibles of Elder. So essentially the owner earnings are higher than reported ones.

@ankitgupta…thanks for bringing this up. It helps to know that it is not a 180 day exclusivity.

[dd1474]

@hitesh2710 Great to now you also being investor in Torrent Pharmaceutical.

Find enclosed my email to the company seeking wide variance between standalone and consolidated Q1FY16 PAT

Anyone can provide explanation for jump in variance?

Discl: Holding for last 3 years

[ankitgupta]

Zyg was acquired for Rs.230 crore and has two plants. It’s primarily into derma segment and it’s plants are USFDA certified. It had sales of Rs96 crore for FY15 primarily from contract manufacturing. It doesn’t have any ANDA and DMF filing but current has 10 15 products under development. Seems to be a strategic fit into company’s US portfolio which currently doesn’t have any exposure to derma segment.

[hitesh2710]

dhiraj,

For me torrent was a sort of chance pe dance. We all knew about abilify and its impact on alembic stock price. The logic was that abilify should also provide decent returns for torrent. Plus the elder portfolio is a very good strategic fit for torrent. And that should take care of domestic growth.

At around 1300-1330 levels it looked as if downsides were limited and if the investment logic played out correctly there could be a potential upside of 30-50%. This is a recipe for a hefty allocation and good overall returns expecations if the thesis plays out. And besides if things fall properly in place for next couple of years this could turn out to be a longer term investment as well rather the opportunistic kind of bet it was thought of.

Whoever I talked to was worried about poor growth in past couple of quarters but I feel we need to look ahead while formulating our thesis (provided looking ahead gives a clearer picture and there is some predictability to base our thesis)

The data you put up about variations in standalone and consolidated is something difficult to understand. I too have seen that such a big difference as there is this year in q1 fy 16 is difficult to explain. Also the big amount of tax on conso entity.

The concall details whenever they will be available ( I think researchbytes will make it available in a couple of days or else many brokerages are covering this stock and will easily incorporate the important snippets in their post concall research reports) will provide some pointers to the tax issue and the standalone and conso conundrum.

[mohdrehan1]

Very complicated accounting

Consolidated account has less PBT ( 859 Cr) and more tax ( 410 cr )
Standalone has more PBT ( 1139 Cr) but less tax( 309 cr)

[wpf123]

Torrent Investor presentation uploaded in Researchbytes
http://www.researchbytes.com/Torrent-Pharmaceuticals-Limited-T0181.htm

Disc: Not invested

[PraveenA]

Based on the 2015 AR (page 107, related party transactions) , the standalone numbers include sales to subsidiaries. I think these sales will reflect in the consolidated numbers with a lag once the subsidiaries make the actual sale. This is one possible explanation for the discrepancy between standalone and consolidated numbers.

[bandlab1]

I have listened to the concall in parts, regarding the higher tax expenses, the management has clarified that

1. the tax is paid once the shipment leaves from india
2. almebic US keeps 20-30 days in-market inventory
3. sales are realized the moment they sell to their channel partners

so based on this the tax is for 3 months plus 20-30 days in-market inventory whereas actual sales reported doesn’t include the in-market inventory. the management clarified the overall year tax rate would remain same as last year. with this we can assume q3, q4 taxes will be less

[Ankit]

I also dialled in torrent’s call. Apart from the tax issue which bala has already highlighted, here are some other notes which I have taken:

1. 1QFY15 had contribution from elder portfolio just for 2 days as they consolidated elder portfolio from 29th june 2014. Torrent portfolio grew by 15% yoy in 1QFY16. Rest of the growth can be attributed to Elder.
2. Brazil business grew by 20% yoy in constant currency but declined 7% INR terms due to currency movement.
3. Europe business grew by 16% yoy in constant currency.
4. Abilify pricing is expected to remain stable. Management expects to improve market share from current 10%.
5. They are looking for acquisitions in US but will only do it if they find value and strategic fit.

[ankitgupta]

Please find attached the pipeline for Torrent for 14 out of their 19 ANDAs pending approval. It becomes very difficult to identify the ANDAs filed if the company is does not manufacture its APIs (due to lack of DMF filing). However, in this case research reports and news on litigation by the innovator become primary source of information for the ANDAs. The key thing I have realised is it is very difficult to identify the potential of a particular molecule before USFDA gives an approval. Before the approval, all the research reports were stating that gAbilify will be very competitive. However, post non approval of the molecule for Sun and Zydus, it became ‘the next big thing’.

The company has two Tentative approvals:

1. Rosuvastatin Calcium (gCrestor): To be launched in FY17 (May, 2016). Market size of USD 5.30 billion. It will be a competitive product with 10 tentative approvals including Indian players like Aurobindo, Sun and Glenmark. The success will depend on how many players get final approval. Can be FTF.

2. Memantine Hydrochloride (gNamenda): To be launched in FY16. Market size of USD 1.20 billion. Teva, Lupin and Amneal Pharms have received final approval. Torrent and Alembic along with seven other players have tentative approval.

Other two key launches during FY16:

1. Esomeprazole Magnesium (gNexium): To be launched in FY16 (most probably in July, 2015). Market size of USD 1.50 billion. Its a limited competition product. Currently, IVAX, a subsidiary of Teva Pharma is the only company with final approval while Mylan has tentative approval for the generic. Lupin, Aurobindo and Dr. Reddy’s are also in fray. Lupin in their last concall has indicated that they expect approval for the same during Q4FY16 or early FY17.

2. Toleterodine Tartrate (gDetrol): To be launched in FY16. Market size of around USD 500 million. Its a limited competition product with just three players including Teva, Mylan and Apotex having final approval and Sandoz having tentative approval. As per some research reports the prices havent dropped much (less than 20%) and even after Torrent enters, the price are not expected to drop much due to limited competition with not many DMFs filed.

Apart from the above mentioned molecules, there are few other molecules including gBenicar, gExforge, gLatuda, gBystolic, gSeroquel and gSidenafil expected to be launched in next two to three years. Last year their US sales (ex gCymbalta which was a 180 day exclusivity product and launched in November, 2013) grew by 54%.

Key Molecules.xlsx (17.5 KB)

[pikrohit]

Here are my notes for concall

Elder Pharma-
Shelcal and Chymoral are moving up in rankings. Shelcal now 12th rank. Chymoral 25??
Contribution of 2 was 75% of Elder revenue before acquisition, now 81%. They have higher EBITDA

Zyg pharma had revenues of 50cr. It will be a platform to launch new products in US.Plan to file 10 ANDAs in next year, 15 more next year.

Views on US business? Abilify high base will reduce growth next year?
revenues never rise in straight lines in generic business. Few launches in next 2 years can provide surprises. It is very hard to predict revenues until launch happens. We can control internal factors like capacity, supply chain but outcome depends on how many competitors finally show up at the starting line. FY13-14 sales were 125, FY14-15… 134, inspite of higher base. there was strong growth of base
business.

Not sure but they mentioned they are planning 22 FTFs? Confirm in concall transcript.

Acquisitions in US?
Looking for M&A. Strategy outlined last quarter. Top 2 priorities are India and US. Believe in paying 50rs for a 100rs asset. More importantly they have not been able to find an asset that fits well with Torrent. 3 models to look at valuation- EV/EBITDA, Sales multiple, Cash flows

Abilify market share 10%, what is limiting this?
Expect to see increase in a few months when IMA gets more data. Targeting 15% in any launch in US. Performance has been as per expectation, maybe better. Innovator still has 33% market share. CNS generic drugs are slower to pick up. Pickup depends on therapy. Share of generics will increase. Pricing is stable.
20-30 days of in-market inventory is a common practice. We book sales when we sell to channel partners. Entry of Apotex is very recent, will see how it changes things.
Management talked something about reimbursement which effects 5states of US.

EBITDA margin ex of abilify?
Cant give details. Base business strong and growing. Improved margins of Elder. Last year Q1 Elder sales were not a part of results. Torrent business has grown 15%. Abilify is not the only driver for Torrent.

Nexium launch- has FDA asked more details?
Expect approval soon. 2 minor clarifications asked by USFDA have been replied to. Approval before end of calender year.

Detrol LA?
Awaiting approval anytime in mailbox. Nothing pending from our side

Reason for high other expenses?
It was averaging 340cr per quarter last year. 15% increase YoY gives 400 odd cr. R&D expense more or less same as last year, 4.8%, but ramping up from 600 to 1150 scientist. It may take some time. Expense will be 6% of revenues after this, which is common for many pharma companies.

Earlier Torrent had 100 product registrations in 70 countries. Now we are consolidating geographies. Shut down 30 odd countries because they were too small. Will shut down 15 more and have focus in only 15 countries. Increase sales force, therapies, contact with general physicians.

Working on derma and oncology, other dosage forms-injectibles. Injectible facility in Indrad but no approvals, its for R&D.

Successful FDA inspection completed in May for all 5 facilities. Plans to commercialize Dahej in Q3 or early Q4. Dahej will help increase business in US and Germany. Some capacity production constraints till that time. Underlying momentum is good

Reason for high tax in Q1- Additional inventories were sold from india to US. When inventories in US are sold, this tax will get neutralized. Full year tax rate will not be very different from last year.

Higher other operating income- Since May there is a new scheme of exports benefit. 3% export duty benefit.

Breakup of revenue
Branded generics India 491cr, Brazil 138cr
Generic Total 1130cr, US is 888Cr, others (where Germany is biggest) 242Cr

[dd1474]

I also checked with one of my analyst friend before conference call. He also indicated that it may be due to sales being booked in Indian company while in US company, it remains at purchase price. In fact, he was indicating that it is kind of predictor for Q2 growth for US Business when sales would be effected. Assuming Abilify competition increases in Q3, we may see reverse trend in Q2, when Consolidated profit would be higher (while standalone sales would be lower).

[Anant]

I attended the confcall. Regarding tax they said it is calculated on estimates on FOB value rather than actual sales. This should normalize in future quarters.

[ravimba31]

I did a quick check on shipments of Abilify (aripiprazole) from Mumbai Airport on Zauba. The shipments have dropped significantly from ~ USD 100 mn to ~USD 16 mn for data till 16th July. Please find snapshot below:

Is this a normal phenomenon or does it convey that their Abilify sales has not materialised the way they anticipated?

Thanks,
Ravi S
Disc: Invested. 7% of my pf.

[dd1474]

@ravimba31,

Not sure as Total US Sales during Q1FY16 is Rs 888 Cr for Torrent Consolidated segmentwise number, which would translate in USD 123 milion (@65) while the number suggested by you only for April itself exceeds USD 100 mn+ another USD 100 mn in May 2015. Partly one can explain by sale from India standalone being more then consolidated, but doubt such variance can be explained even by that logic.

Good efforts and information Ravi

[ravimba31]

Thanks Dhiraj , One clarification here. The numbers in my post above are the total shipments of Abilify from Mumbai Airport. Both Torrent & Alembic would have shipped from Mumbai Airport & Alembic also has the ANDA approval for Abilify.

So once we have Alembic’s #s on 1/8/2015 we will have a clearer picture.

But the question still remains. Does Abilify’s declining shipments in July indicate that it is taking time for Alembic & Torrent to penetrate US market?

Thanks,
Ravi S

[hitesh2710]

Usually once a company gets a limited period exclusivity or is in for limited competition for a product it doesnt want to lose out on stocks running out. Hence these companies pile up the inventories in the US so as not to miss the action. So if stocks are in full quantity, they wont ship too much. It would be largely based on demand supply scenario.

Patients are not going to stop using abilify as its a psychiatric drug and is usually sticky and even brands are sticky unless there is compelling economic reason as in case of price erosion. The stickiness is explained by the innovator still retaining 30% plus market share in the face of cheaper options.

These figures will tend to be lumpy. Next big trigger will be the launch of g-Nexium whenever they get the approval.