US clearance of Goa unit a sales boost for Lupin

With inspection issues out of the way, product nods will gather pace, leading to diversification of revenue stream

After a series of negative news dampened Street sentiment on Indian pharma, clearance of Lupin's Goa plant by the US drug regulator comes as a breather. The plant had been under inspection for more than a year now and finally got a go-ahead (in the form of an EIR or establishment inspection report) from the US Food and Drug Administration (FDA). The Street had been cautious since the first inspection in July 2015 as FDA inspections in the past have led to warning letters for pharma firms such as Dr Reddy's Laboratories, Sun Pharma, and Cadila Healthcare, and import alerts for Wockhardt and Ipca. Thus, the EIR brings much needed relief to the stock, which gained seven per cent to Rs 1,519.4 levels on Monday. 

The Goa plant remains crucial for Lupin as 50-60 per cent of supplies to the US are from this facility. Also, the company has many new product filings from Goa, approvals of which are crucial to drive US growth. Of the pipeline of 100 products (exluding Gavis portfolio), filings from Goa are likely to be about 30 per cent. Also, supplies of many key products, like diabetes treatment generics of Glumetza and Fortamet that have been driving Lupin's US growth in the recent past, are from this plant. 

Further, the much-anticipated products (pending approval) which are expected to drive growth such as generic versions of kidney drugs Renagel and Renvela, as well as kidney diabetes treatment drug Welchol, are also from this plant. 

With the clearance of the plant, the overhang of inspections goes away and approvals for new product launches will be faster. Analysts at Religare Institutional Equities say there can be a bunching up of approvals in the next few months. Analysts at Ambit Capital expect Lupin to receive a flurry of approvals (40 in FY18 compared to 26 in FY16) and are expecting annual revenue growth of 39 per cent over FY16-18. 

This will not only be positive for growth but also lead to a diversification of revenues. Anti-diabetic generic versions of Glumetza and Fortamet have in the past few quarters been crucial for US growth and higher competitive intensity was a concern. New approvals in other therapeutic classes and segments will be welcome and provide cushion. Analysts at Elara Research say FY18 will have a well-diversified portfolio as Fortamet and Glumetza generics will contribute only 13 per cent to FY18 profits compared to 40 per cent in FY17. They have upgraded their target price to Rs 1,805 while Ambit's target price is at Rs 1,851. 

Meanwhile, the company is expected to report its financial performance for the quarter ended September on Wednesday. Analysts expect operating profit margin to come down sequentially, with competition increasing in diabetic products, but year-on-year, the growth led by diabetic portfolio and integration of Gavis will be robust. Analysts at Motilal Oswal Securities see revenues growing 30.4 per cent and net profit 68.8 per cent year-on-year. Key growth drivers for FY17 and FY18 will be strong product pipeline for the US including higher contribution from oral contraceptives and launches in ophthalmology and dermatology.