Lupin: Muted show in US drag down Q1 performance

The stock of Lupin Ltd dropped as much as 3 per cent in trade on Thursday on the back of poor quarterly numbers. The company reported a decline of 59 per cent in the consolidated net profit during the first quarter of 2017-18 to Rs 358 crore as against Rs 882 crore seen in the corresponding quarter of the last year. The outcome of contraction of more than 50 per cent in the bottom-line was mainly attributable to the price erosion in select products like Glumetza in its key market (US), disruption in the domestic business on account of GST implementation and headwinds in the other markets like Japan. Higher foreign exchange volatility also impacted the earnings.

The consolidated net sales for the quarter decreased by 12 per cent to Rs 3,807 crore, from Rs 4,342 crore for the same period last year.

Muted US growth

As guided earlier by the management, the company’s business in the US witnessed significant pressure on the back of price erosion and increasing competition from higher ANDA approvals. However, the management has guided that the base business barring Glumetza registered a single digit erosion during the quarter. Lupin’s sales in North America fell by 27 per cent year-on-year (YoY) in the first quarter to Rs 1,602 crore.

The US market accounts for 42 per cent of the company’s total revenues. Thanks to the growing opportunity in the generic space in the US, the company had registered strong growth in the US over the last few years. However, the recent quarters witnessed decline in the revenue due to intensive competition and structural concerns on consolidation amongst the channel partners. The consolidation of Gavis also registered disappointed growth in 2016-17 due to lack of meaningful product approvals and delays in several key launches.

However, Lupin holds the 4th largest USFDA ANDA pipeline. The company has 368 cumulative ANDA filings with the US FDA as of June 30, 2017. The company has received 217 approvals to date. The company now has 45 First-to-Files (FTF) filings including 23 exclusive FTF opportunities. Cumulative DMF filings stood at 187 as of March 31, 2017.

The management guided for 30-35 new product launches in FY18, which could offset base business erosion going forward.

The company is focusing on building a pipeline in niche products with limited competition and high barriers, such as inhalation, biosimilars and complex injectables. Further, the shift in the strategy towards acquiring specialty and niche technological platforms for the regulated markets from its earlier strategy of geographical expansion should help the company to prop up its business significantly.

Other markets

The formulation business in India that accounts for 25 per cent of Lupin’s global sales decreased by 2 per cent YoY in the first quarter to Rs. 932 crore. The decline was mainly due to disruption on account of GST implementation in India. Lupin’s business in Japan reported growth of 8 per cent YoY in the first quarter while the sales from Latin America increased by 17 per cent YoY.

Lupin is well-placed on the regulatory front as comparison to its peers. More recently, the company’s Pithampur facility inspected by US FDA concluded without any observations while the Aurangabad plant was issued one 483 observation which was corrected during the inspection itself. The company expects clearance for Goa and Indore facilities from the USFDA in next couple of months.

Operating profit for first quarter decreased by 426 bps YoY to Rs 800 crore due to lower sales. Operating margins came in at 21 per cent, down from 32 per cent seen in the same quarter last year.

At the current market price of Rs 1,003, the stock trades at 23 times its trailing 12-month earnings — around 25 per cent premium to other large cap peers such as Sun Pharma and Aurobindo Pharma.

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