Hold on to Lupin For Better FinanciaI Health

Lupin is not only a global leader in anti-tuberculosis (TB) and other infectious diseases but also one of the fastest growing prescription companies in the US. 

Lupin is currently developing complex products in areas such as opthalmology, respiratory, controlled substances, dermatology and biosimilars.

Established in 1968, Lupin has over time emerged as a leading Indian generic exporter. During these years, Lupin changed focus in therapies - from acute to chronic, while tapping overseas markets at the same time. Lupin received USFDA approvals for its two facilities Ankaleshwar and Mandideep way back in 1989.

Lupin has 11 manufacturing facilities, including two in Japan. It has seven formulations, out of which three are USFDA approved, and four APIs, out of which two are USFDA approved. Lupin is amongst the largest pharma companies in domestic market with net sales in excess of Rs 17000 Crore. The company has a strong brand portfolio, with R&D costs in excess of 13 per cent of sales. Exports for Lupin account for almost 73 per cent, with developed markets (DMs) contributing the most to the overall exports. DMs contribute almost 58 per cent to the total exports, whereas emerging markets (EMs) contribute 15 per cent to the total exports of Lupin. As far as sales mix goes, Lupin generates 10 per cent from APIs and domestic formulations –25 per cent, DM formulations – 56 per cent and EM formulations – 9 per cent.

FINANCIALS 

Over the last ten years, the revenues have grown at a CAGR of 20 per cent, EBITDA has grown 26 per cent and the PAT has grown 21 per cent.

If we consider the period FY12-17, the company's revenue has grown at a CAGR of 20 per cent to Rs 14466 crore, EBITDA has grown by 17 per cent to Rs 43333 crore and PAT has grown by 13 per cent to Rs 2551 crore.

The company has over the years increased its R&D spend from 6.6 per cent in FY12 to 9.2 per cent in FY17. The company is expected to face a slowdown in growth in revenues, EBITDA and PAT. Having said that, Lupin is comfortably positioned to grow at a healthy industry rate (beating the industry) owing to the strong US pipeline.

The vast experience and excellent understanding of the US market, along with continued traction in Indian branded formulations with higher chronic focus augurs well for Lupin in the long term.

Even as growth shrinks for the company in major developed markets, an opportunity lies for Lupin to expand its market in Japan which might be the only market showing some improvement. Japan sales grew by 15% to JPY 28,756 mn during FY17

DISAPPOINTING Q4FY17 

The Q4 earnings for Lupin surprised thestreet with its lower net profit and revenue figures owing to lower than estimated US sales. Provision for a contingent legal liability of Rs 1.6 bn and higher R&D expense of Rs 6.7 bn, which is roughly 16 per cent of the net sales, along with high forex losses were the major contributors to the poor EBITDA margin, which led to a decline in net profit by ~50 per cent YoY to Rs 3.8 bn. During Q4, Lupin provided for a potential liability towards its Australian subsidiary in respect of compensation for patent litigation towards its Isabelle generic launch in Australia.

The company's revenues came in at ~ Rs 41 bn. The drop in sales can largely be attributed to factor of seasonality and drop in Lupin's market share in gGlumetza and gFortamet. 

The EBITDA margin was affected due to one-off adjustments (legal provision, forex and R&D), otherwise the EBITDA margin, adjusted for the one-offs, stands at an impressive 28.8 per cent for the latest quarter. The gross margin improved in Q4FY17 and a sequential decline was seen in staff costs.

CONCLUSION :- 

Lupin's majority of revenues come in the form of exports. If we consider the stronger rupee outlook and incremental pricing pressure in the US, the growth may remain subdued in FY18 for the company. There may be postponements of few ANDAs launched in FY19 as well.

However, Lupin remains one of the top Indian pharma companies facing the uncertainties dogging the pharma industry which is seen undergoing some structural changes.

Healthy base business and robust pipeline of ANDAs, which include 28 FTFs, clubbed with flourishing India business is expected to provide growth impetus to the pharma major.

Lupin has invested heavily in R&D to develop complex generics, inhalers and biosimilars, the benefits of which are likely to accrue from FY19 by which time the US FDA approvals are expected to pick up. New product launches can also prove to be handful this fiscal. 

The management has given a guidance of single digit topline growth in FY18 and a double -digit growth in FY19. As per the management guidance, EBITDA margin is expected to remain in the 26-28 per cent region, which is healthy. 

In the near term, steady pick-up in ANDA approvals will be instrumental to the movement of share price of Lupin, even as the valuations looks attractive from long term perspective.

Lupin is seen trading at a significant discount to its historical multiple after the recent correction in the price of the stock. Despite sluggish approvals by the FDA and the consolidation, Lupin holds the fourth largest USFDA ANDA pipeline and thus provides comfort for long term investors to look at the stock from investment point of view.We recommend a 'HOLD' in the stock.

• Way ahead for Lupin
   Will be a leading generics player with a larger complex generics mix
   Building speciality business
   Increase geographical spread
   Aim to be the leading global player by 2020+

Sarabjit Kaur Nangra VP - Research, Pharma , Angel Broking

Last year has been bad for pharma companies in India, be it US sales or domestic markets or the currency factor. The performance has clearly been below average for the industry as a whole. The top companies such as Sun Pharma, Dr Reddy's and Lupin have hinted at pricing pressure from the US markets for under-performance, along with other factors. One can look at good quality pharma stocks at this juncture. You have to look at a one year trend for pharma companies. Currently, Lupin is trading at 17 to 18 times FY18 numbers and that is significantly cheaper valuation. Lupin is pretty attractive right now, so is Sun Pharma and Dr Reddy's. We believe there is a decent upside in Lupin given that it has been beaten down heavily in the last one year.

FY 17 Performance
 Japan sales grew by 15% to JPY 28,756 mn during FY17
 US business crossed $ 1 bn mark in FY17, registering 37% growth ($1,207 mn)
 Philippines business grew by 23% to PHP 1,969 mn in FY17