ET Analysis: With Unichem Buy, Torrent's new M&A star in pharma

By Kiran Somvanshi
ET Intelligence Group

The Torrent-Unichem deal did not really surprise the pharma industry. The 73-year-old Mumbai-based Unichem had been an attractive and an obvious target in the domestic formulations market for some years now, and Torrent buying it makes business sense.Besides, with the industry facing one of its challenging periods, consolidation is going to be the natural way to grow.

However, what the deal underscores is the rise of Ahmedabadbased Torrent Pharma as another Indian pharma firm being successful at its M&A game and using it effectively to achieve scale.

Before this deal, the company had made four acquisitions in the past four years, and has built well on them amidst the challenging times. This deal, coming in on reasonable valuations of nearly four times of revenues, propels Torrent to become the fifth largest player in the domestic market with a market share of 3.4%.

It will also enable the company to venture into the promising area of over-the-counter drugs with Unichem's digestive enzyme brand.With a debt to equity ratio of 0.55 at the end of FY17, the company is financially on a strong footing to afford an acquisition of this size.

Little wonder then that Torrent is one of the few pharma stocks to not have lost a significant value on the bourses in the past couple of years. Its revenues have grown at a compound annual growth rate of 18% with its profitability maintained at 23%. It remains to be seen though how well Torrent handles the overlap of resources, brands and talent.

The two companies have some brands in common in the therapeutic areas of cardiology and CNS. Besides, 3000 employees would come on board for Torrent, which already has an employee base of nearly 12,000.

For Unichem, the deal could turn out to be a make-or-break deal. Its legacy domestic business (contributing 60% of its revenues) had be en a drag on its growth in recent years. Its move to sell the main business to focus on developing the international one -a precedent set earlier by Piramal Enterprises in 2010 -seems to be a justifiable one.

Unichem has a promising generics and contract manufacturing business in the US. The deal gives an opportunity to the management to start afresh on initiatives in research, new chemical and biological entities that require funding. It remains to be seen whether Unichem follows Piramal's trail and emerges as a promising player or sits on the fringes as an `also-ran'.