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Despite the strong industry headwind, Torrent Pharma remains in the pink of health, thanks to its diversified geographical presence and specialty products.

Prathamesh Mulye

Two years ago, drug companies were accused of “getting away with murder”. Perhaps, President Trump was overstating it. Theatrics is a politician’s forte. But, Indian companies soon began facing the heat in that market. Once their favourite hunting ground, the US market turned into a nightmare. There was price erosion, worsened by the consolidation of buyers and an increase in the number of suppliers. Biggies with high exposure — Sun Pharma or Lupin or Dr Reddy’s — are still grappling with the crisis.

Amid these turbulent times, there is one company, which has a business model in place, to tackle the headwind emanating from the US market — Ahmedabad-headquartered Torrent Pharma. In 2014, the company had decided to focus on domestic business and specialty products. This strategy has now paid rich dividends.

Speaking exclusively to Outlook Business at their plush office facing the Sabarmati river, Aman Mehta, chief strategy officer, says, “It was a conscious decision to continue with a greater focus on India, although we had a robust pipeline in the US market. How we looked at the US five years ago is very different from how we are looking at it now. It enabled us to allocate more resources to the branded markets.” His father and chairman of the company, Samir Mehta, has been instrumental along with his brother Sudhir Mehta in the strategy shift that Torrent Pharma undertook. Similarly, the brothers have steered the Torrent Group following the ‘diversify to minimise risk’ mantra.

Currently, the domestic market accounts for 42% of the company’s revenue, while the troubled US market contributes 21%. Torrent Pharma also has a strong presence in Brazil and Germany, which contribute 13% and 9%, respectively, to the revenue. With lesser dependence on the unfavourable US market, strong geographical diversification and fortifying of India business, Torrent has managed to grow at a decent pace over the past five years. Sales have grown at a CAGR of 13% to 74.62 billion and Ebitda margin has expanded from 21.92% to 25.86% (See: High growth path).

SPECIAL FOCUS

The pharma company did more than pick the right markets though. It went contrarian even with its products portfolio. While the rest of them were focused on selling cheap generics in the US market, Torrent went straight for specialty products — chronic and sub-chronic therapies in India, and branded generics. Chronic illnesses are ones that worsen over a period of time and sub-chronic are conditions that last for at least a month. “Chronic and sub-chronic therapies tend to have a longer prescription cycle,” says Mehta. Around 75% of the company’s revenue comes from this segment, whereas for the rest of the Indian pharma industry, it is 53% (See: Perfect dosage). Companies such as Sun Pharma and Lupin have also started focusing on chronic therapies since 2014, but still get a substantial part of revenue (40-45%) from generics in the US.

Torrent Pharma sells generics too, but focuses on branded ones in most geographies, except the US and Germany, says Siddhant Khandekar, research analyst at ICICI Direct. Unlike regular generics, branded pharma products are exclusively marketed by the developer. He adds, “Therefore, the company enjoys one of the best gross profit margin profile (70-72% range) among peers.” Around 90% of Torrent’s products are branded. With such offerings, there is higher brand recall within the medical fraternity.

The company also has more pricing power compared to its peers, as around 89% of its India portfolio is not listed under the National List of Essential Medicines (NLEM). “It means they can take 10% price hike each year on a large share of their product portfolio. This has been driving the Ebitda margin expansion and margins will increase going forward,” says Krishnanath Munde, pharma analyst at Reliance Securities.

ACQUIRING GROWTH

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July 19, 2019

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