Lupin's underperformance may continue on US-driven regulatory challenges

US sales trajectory, margins key triggers over the next couple of quarters

The Lupin stock has slipped over six per cent since mid-September highs with the observations for its Goa plan adding to the downtrend. While fresh worries over regulatory compliance is a negative, launches from approved sites, the recovery in US sales and operating profit margins in the coming quarters and strong India business keeps brokerages confident about the company’s prospects.

In the near term, however, the stock will continue to be under pressure given its regulatory track record and observations across multiple sites catering to the US market. After the Somerset facility in the US which received a Warning Letter (WL) in June this year, this is the second facility to have regulatory action in the last four months. In a previous note on Lupin post the WL on Somerset, analysts at Nomura Research had highlighted that the development was a setback and indicated the company’s continued struggle on US FDA compliance issues, particularly with respect to older facilities.

Besides Somerset, the company's formulation site at Indore, Goa, Mandideep and active pharmaceutical ingredient (API) site at Tarapur are also classified as official action indicated which means major compliance issues following inspections between 2017-2019. The silver lining, according to them, is that the new facilities at Indore (unit III), Nagpur and the API site at Visakhapatnam inspected between 2019-2020 have successfully gone through a US FDA audit. The company indicated that it is confident of addressing the observations satisfactorily and comply with the good manufacturing practices across all its facilities.

The Goa facility, which makes oral solids, accounts for over a quarter of revenues according to Kotak Institutional Equities. In the latest inspection, the Goa site which had regulatory issues since 2017 received seven observations.

Though there have been additional regulatory hurdles, Motilal Oswal Research continues to maintain its earnings estimates as the potential inhaler products are on track for approval and are from an USFDA compliant site. The brokerage, however, points out that asset turn remains impacted due to lack of approval from sites under the regulatory cloud.

The street will keep an eye out for the US sales trajectory; the company has guided for sales in that geography to cross $200 million by the December quarter of FY22 on the back of a ramp up in inhalation products Albuterol and Brovana authorised generic. The sales run rate has been lower than analyst estimates with June quarter sales of $172 million. Margin trajectory, India sales growth and product launches are the other triggers for the stock.

The stock has been underperforming its peers over the last year given the regulatory issues, lower sales in the US market and higher valuations. While the brokerages are positive about the stock, investors should await pick up in US sales and margins before considering an investment.