Founded in 1968, this nondescript company has quietly climbed up to be among the top-5 domestic pharma companies in the country. And its strength is not just limited to Indian shores alone. It has also become the fifth-largest Indian generic player in the US in terms of prescriptions and second only in terms of approvals awaited. Lupin has a number of things going for it in the US too, which is its largest market, and also Far-East (Japan).
Strengths
Lupin has one of the strongest pipelines of ANDA (Abbreviated New Drug Application) filings amongst Indian companies. Total ANDA filings stand at 176 and the company has managed 20 such filings every year for the past couple of years. These are expected to monetise over the next couple of years.
The primary trigger in the US is the impending launch of Lupin’s generic of the blockbuster (sales of $1 billion) Tricor in January 2013 which is expected to add around $30 million in FY13 and $60 million in FY14. Oral contraceptives (OC) are the second category of products that are expected to deliver for Lupin. With the launch of 9-10 OC products in FY13, analysts tracking the stock estimate OC to bring in $43 million in FY13 and $91 million in FY14.
The company has also targeted oral contraceptives as the segment where it wants to focus on. This is a market of $3-4 billion in the US. Lupin has 33 ANDAs in this category and launched three products in FY12 with another 9-10 products expected to be launched this financial year.
* Bringing in 27 per cent of Lupin’s revenues (FY12), domestic formulations is the company’s second biggest revenue generator after US operations. Domestic sales have been growing at 20 per cent in the past three years mainly because the company has managed a successful shift from acute to chronic therapies
* Unlike the US, the generic market in Japan is highly under-penetrated. Only a third of all drugs (by volume) is expected to come from generics in 2014 and 40 per cent by 2020 when generics are expected to achieve 60 per cent market share in other developed markets during the same timeframe. The company is expected to grow its Japan operations by at least 15 per cent in the next couple of years
* An improved product mix, the launch of Tricor and other OC products in the US is expected to push up margins by as much as 3 per cent in FY13 itself to around 20 per cent levels. Though the US market brings around 35 per cent of revenues, it forms half of the company’s total Ebitda
Concerns
The OC market in the US is estimated at around $3-4 billion. That is a big enough market to attract more players. Though Lupin has some headway in the OC space, competition is fast catching up. A host of companies including our very own Sun Pharma, Glenmark, Ranbaxy and Mylan and Novast Labs are readying to get into this space. Mylan, for instance, has filed 30 ANDAs in this space alone. Home grown Sun Pharma is expected to launch products aimed at the entire OC spectrum. More players will mean margins will go down in the future.
* Between 2007 and 2011, US brands grew from $27 million to $144 million (the company does not disclose individual drug numbers). But so far, only Suprax has tasted that degree of success. Other attempts based on acquisitions and partnerships with brands such as Antara and AeroChamber have not met with the same level of success. With fewer new discoveries, it will get more difficult for Lupin to acquire more brands for a song
* Suprax does not have patent protection and as such continuously carries the risk of a competitor offering a similar product. Suprax is no matter small for Lupin. It accounts for an estimated 6 per cent of the company’s US sales and adds 20 per cent to its US bottomlines (FY12 – all numbers estimates). Another Indian company, Orchid Pharma, is trying to get a bite out of Suprax. Though no new competitors have started to market the drug, analysts tracking the company say that the full impact of any new entrants should be clearer by FY14.
Financials
Lupin has been able to ride out the global recession with respectable numbers. Between 2008-12, when the recession was in full force, Lupin managed to grow its topline by an enviable 25 per cent annually. Operating profit was up 23 per cent annually during the same period. Margins have remained at or near 20.5 per cent levels. Similarly, RoCE has fluctuated between 25-27 per cent levels. Debt to equity has come down from 0.94 (FY08) to 0.14 (FY12). During the most recent quarter, the company reported sales growth of 43 per cent (y-o-y) on the back of strong export formulations sales (up 52 per cent).
Domestic formulations was up 25 per cent. US recorded 63 per cent growth while Japan sales were higher on the back of Irom acquisition. Gross margins were higher at 63.1 per cent as compared to year ago margins of 60 per cent. Higher taxation and interest costs meant that PAT was up 33.5 per cent. Lupin filed three ANDAs in the last quarter taking total filings to 176.
Valuations
Though Lupin is less than 10 per cent away from its 52-week highs, the stock trades at a P/E of 27.06 times (TTM). That makes it more expensive than the 25 times at what the industry trades at today. Given that the Tricor gains are ahead (beginning January-March quarter 2013), the ramp-up in the OC portfolio and stable domestic business, Lupin should continue to do well. Investors with a three-year horizon may lock into the stock.
This article was originally published on November 28, 2012.
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