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Who’s next, after Torrent-Unichem?


20171130ep02After a search that reportedly lasted a decade, Unichem Laboratories finally settled on Torrent Pharma as the best choice to sell its domestic branded formulations business in India and Nepal. While the acquirer strengthens its focus on the domestic market, the seller gets to flex its wings overseas. Unichem CMD Prakash Mody plans to return half of the Rs 3600 crore to his stakeholders. The rest will be his war chest for acquisitions, to improve existing manufacturing, marketing and R&D facilities. He plans to spotlight complex biologics and specialised generics as part of a rejigged overseas strategy, with a special focus on the US. PM Modi has already apparently ‘identified specific opportunities and niches which we can potentially capitalise on,’ clearly indicating that he is ready for his next innings and is not going to walk away into the pharma sunset.

Post the deal, Torrent jumps up the rankings in India’s Rs 1.14 trillion pharma market: from 13th to 5th in secondary sales according to IMS, while AIOCD moves the Ahmedabad based company from 13th to 8th position. Torrent’s market share goes from 2.4 per cent to 3.4 per cent. As Torrent Pharma’s Chairman Samir Mehta put it, approximately 3000 plus employees will be added to Torrent Parivaar, and the company gets access to an additional 2,100 stockists across India. The deal also marks Torrent’s entry into the lucrative Indian OTC market, thanks to Unichem’s Unienzyme.

Torrent has had five acquisitions in the Indian market, so it seems to have perfected the art of absorbing acquired assets. But, it won’t be smooth sailing. Past mega mergers like the Sun Pharma-Ranbaxy deal faced some friction from the latter’s field force, symptomatic of a clash of cultures and compensation scales.

On paper, Torrent bags brands worth Rs 200 crore, while market share in cardiology, CNS, and GI therapies segments will rise a few percentage points. But, Torrent could find itself in the same position as Abbott post the 2010 acquisition of Piramal Healthcare’s branded generics business. Abbott did gain a few big brands, but a long tail of smaller ones as well. Most brands acquired from Unichem are older generation molecules, all of which have tough competition from the same molecule as well as next-generation products. Thus, the scope for price hikes is not very high. An HDFC Securities report on the deal cautions that the benefits will not be immediate but will be visible over a period of time by increasing medical representative (MR) productivity (which is Rs 2.7 lakhs/ MR for Unichem versus a much higher Rs 6 lakhs/ MR for Torrent) and cross-selling (2,100 additional stockists). Additionally, the analyst points out that this acquisition will largely be funded by debt ( Rs 30-32 billion), as Torrent’s internal accruals are not very strong, which would in turn negatively impact earnings for the next two years.

But on the positive side, the deal will increase contribution of Torrent’s domestic business in both top-line and EBITDA to 44 per cent and 55 per cent respectively (which pre-acquisition were 36 per cent and 48 per cent). The enhanced business mix will in time ensure sustainability of future cash flows.

The buzz is, there are many companies like Unichem who are prime acquisition targets, either for lack of a succession plan or interest of the next generation in the pharma business. For such companies, Unichem’s Mody is the best example of how building and nurturing brands pays off in the long run.  In fact, now that he has the finance to chase his dream in global markets, it will certainly not take him seven decades to achieve critical mass. We wish him all the best!

Viveka Roychowdhury

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