Lupin: Buy

Robust product pipeline in the US and steady growth in the domestic market may hold pharma major Lupin in good stead over the next two years. Though the stock has returned 55 per cent gains since our last recommendation in September 2012, it has the potential to deliver gains in excess of 10 per cent over a one-year time-frame, thanks to the company’s strong growth prospects for the next two years.

At the current market price of Rs 898, the stock trades at around 20 times its 2014-15 expected earnings, implying a 12 per cent premium to the industry, given the sound business fundamentals. Investors with a one-to-two-year perspective can consider buying the stock.

The US is the largest market for Lupin, accounting for nearly 40 per cent of revenues. Lupin has presence in the branded and unbranded generics segments in this market. Its US revenues have tripled in the last five years. The branded business, with three products, accounts for around 21 per cent of the company’s US revenues.

Prudent life-cycle management of its flagship anti-infective brand, Suprax, helped growth in the branded segment. This more than offsets the decline in the company’s cholesterol lowering brand, Antara.

To insulate itself from generic competition, Lupin plans to launch a chewable tablet and concentrated suspension form of Suprax in the current fiscal. With 170 marketing representatives currently promoting its three brands in the US, Lupin is scouting for new brands to leverage its existing field force.

The company markets 46 generic drugs in the US, constituting nearly 79 per cent of revenues in this market. Lupin launched 12 products last fiscal, which include opportunities, such as generic copy of Abbott’s cholesterol lowering brand, Tricor. New launches helped the company grow its US generic revenues by 59 per cent in 2012-13.

A healthy pipeline of 116 products (of which 98 are pending approval) will drive the company’s growth in this market over the next two years. This includes the exclusive right to sell the first generic copy of 12 drugs for a period of six months, ahead of the entry of other generic players in the same drug.

This opportunity termed as first-to-file (FTF) is granted to the company which files for the generic version first, succeeds in invalidating the innovator patent and securing regulatory approval. With brand sales of over $2 billion (Rs 12,000 crore), these 12 products can potentially add around Rs 1,500 crore to Lupin’s revenues.

Lupin also has shared FTF exclusivity on 17 products (along with other generic players) addressing a market of nearly $15 billion. Approvals for the company’s oral contraceptive filings are gaining traction too with seven product approvals last fiscal. It has also filed for eight products in the ophthalmology space.

Lupin has identified dermatology and respiratory as its medium-term growth drivers. In addition to filing products on its own, the company is also exploring inorganic opportunities in this space to fill the portfolio gaps.

A strong product pipeline in the US should help Lupin sustain healthy growth momentum over the next two years. Focussed approach towards niche therapies — ophthalmology, dermatology and respiratory should drive the company’s growth over the next four-five years.

Steady growth in India

Domestic formulations is the second largest segment for Lupin, accounting for over a fourth of its revenues. Having started out as a major player in the anti-tuberculosis segment, the company has gradually scaled up presence in chronic therapies — cardiovascular, anti-diabetes and neuro-psychiatry. Higher-margin chronic therapies now constitute nearly 63 per cent of the company’s domestic revenues, compared with 31 per cent six years ago. With a field force of 5,200 people, Lupin’s strong brand franchise in the home market has helped it race ahead of the market over the last few years. The company has, on an average, managed to grow at 1.5 times the pharma industry. In addition to own launches, tie-ups with global innovators have also aided growth. For instance, the company’s collaboration with insulin major Eli Lilly to promote the latter’s Huminsulin products helped Lupin broaden its anti-diabetes portfolio. Similarly, the company has a marketing tie-up with Novartis to sell the latter’s inhaler brand Onbrez. Lupin recently announced a strategic co-marketing partnership with the US-based pharma major, MSD, to jointly sell its pneumococcal vaccine in India.

Lupin has managed to bridge the portfolio gaps by in-licensing 37 drugs from global innovators in the last four years.

The impact on account of the new drug pricing policy is likely to be negligible at less than 2 per cent. With a strong brand franchise and product pipeline, Lupin may continue to outpace the market over the next two to three years.

Lupin’s revenues from the Japanese market grew over 50 per cent in rupee terms, largely due to consolidation of I’rom Pharma’s revenues. The company envisages improving margins over the medium term by gradually shifting manufacturing to India.

Margins to trend up

In addition to favourable revenue mix and cost-optimisation efforts, ramp up in utilisation at its Indore facility may help Lupin improve its operating leverage and margins. Continued weakness in the rupee may also benefit the company’s revenues and profits.

Lupin’s revenues grew 36 per cent in 2012-13 to Rs 9,641 crore. Operating margins expanded by 3.1 percentage points to 23.5 per cent last fiscal, helped by strong performance in the US and India. Net profit grew by an impressive 51 per cent to Rs 1,314 crore in 2012-13.