Lupin's Q1 hit on multiple counts

Slow approval rate for new launches in US impacting growth

Lupin marked another quarter of poor show in US sales that pulled down its overall performance in the June quarter. The US business, which contributes 40 per cent to Lupin’s sales, is muted due to a lack of new launches. This, at a time when earlier mega launches of anti-depressant Cymbalta and cholesterol-lowering Niaspan generics are facing competition. Lupin has also seen its sales suffer by channel consolidation in the US. The high base of the year-ago quarter has only made things worse in sustaining growth.

US sales dropped 26 per cent year-on-year (y-o-y) to Rs 1,191 crore during the quarter. The Japanese (10.5 per cent of sales) business also saw currency headwinds. Though domestic (29 per cent of sales) revenues grew 16 per cent, it was not adequate to arrest the decline in sales and profits.

Lupin posted net sales of Rs 3,074 crore, down 6.4 per cent year-on-year, which were 8.3 per cent lower than Bloomberg consensus estimates of Rs 3,352 crore.

Earnings before interest, tax, depreciation and amortisation (Ebitda) at Rs 892 crore was again lower-than-expected Rs 907 crore, while net profit at Rs 525 crore (down 16 per cent y-o-y) was way below estimates of Rs 587 crore.

While the company might be passing through a soft patch, it continues planning for long-term growth. On Thursday, it got into a definitive agreement to acquire New Jersey-based GAVIS Pharmaceuticals for $880 million (Rs 5,610 crore). Given GAVIS’ CY2014 revenues of $96 million, the acquisition is expensive at 9.2x sales. However, GAVIS has 66 pending Abbreviated New Drug Application (ANDA) approvals (25 para IV and eight first-to-files) and another 65-plus products under development. The acquisition not only accelerates Lupin’s entry into niche areas such as controlled substances and dermatology. It also creates the fifth largest portfolio of ANDA filings with the US Food and Drug Administration (FDA), addressing a $63.8-billion market. Lupin has of late made acquisitions in Brazil to strengthen its operations in Latin America and another one in Russia, which bodes well for medium-term growth.

With regards to the US, analysts expect the growth to catch up in the second half of FY16. Those at Barclays say steady sales in Celebrex ($9 million a month sales) should be aided by traction in launches starting the second half of CY2015.

 

However, some concerns on US FDA observations to the company’s Goa plant, which supplies solids to US market have also cropped up. Sarabjit Kour Nangra at Angel Broking says although further details are not available, the observations don’t look that serious.

However, given the issues that Indian pharma is facing, the market is likely to await signals indicating a pick-up in growth as well as clarity over US FDA observations before turning bullish on the richly-valued stock.