Torrent stretches balance sheet to acquire Unichem’s India business
Unichem Laboratories Ltd gains significantly in the near term from the sale of its domestic (including Nepal) pharmaceutical business to Torrent Pharmaceuticals Ltd. The Street, it appears, was already clued into the deal. Unichem’s shares have risen by 24% since 18 October but Monday saw a slight decline.
At the current price of Rs310, its market capitalization is Rs2,818 crore, and it is getting paid Rs3,600 crore for the India business alone. This business earned Rs842 crore in revenue or about 60% of the company’s stand-alone revenue in fiscal year 2017 (FY17). Unichem has said it plans to return over half the money to shareholders. If it returns half, it works out to Rs200 apiece pretax, but shareholders should expect a lower amount post-tax.
Once the payout is done, attention will shift to the longer term, with Unichem planning to focus on its international business. Retained profits from the transaction will be invested in research and development, especially for the US market where it will file about 20 generic drug filings a year over the next three years, according to a Mint report.
How this works out remains to be seen as the US generic market has turned into a tough one, what with price erosion, competition and stringent inspections that have tripped plans of many firms. While the filing plan may be aggressive, approvals take time.
Unichem may take the acquisition route to speed up the process.
Coming to Torrent, the deal is not cheap so why did it do it? One answer is scale (and a higher seat at the ranking tables). If it had been done in FY17, the acquisition would have added about 40% to the company’s India business revenue.
In scale, Torrent moves up from number 13 to 5 in terms of sales, as per AIOCD Awacs data, and its market share moves up from 2.4% to 3.4%.
Apart from scale, Torrent also liked the fit with its own portfolio. It cites Unichem’s port- folio having a two-thirds contribution from drugs to treat chronic/sub-chronic ailments (such as hypertension). It improves the depth of Torrent’s existing portfolio, rather than adding several new categories which may then have stretched its resources. In addition, it gets Unichem’s plant at Sikkim and 3,000 employees.
Torrent’s presentation talks about cost synergies and its own productivity track record. Chances are it will seek to trim the headcount somewhat, improve productivity and eliminate overlapping functions or activities to lower costs.