Risk-reward favourable for Lupin as domestic biz provides cushion to growth

Analysts are now upgrading the stock as they expect a recovery for Lupin moving forward, besides a significant improvement in the company's free cash flows

Shares of Lupin have rebounded more than 10 per cent from their 52-week lows seen last week. Though challenges continue for the company, given the regulatory issues raised by the US Food and Drug Administration for its plants, and the drug pricing lawsuit against a host of Indian (including Lupin) and global pharma companies in the US continuing to be an overhang, analysts believe the risk-reward equation is turning favourable for Lupin.

For one, big product launches are expected to start this financial year. The Street is also keeping an eye out for the ramp-up of Solosec. These initiatives can drive Lupin’s US earnings, at a time when its India and emerging markets is growing at a healthy pace. Apart from driving growth, these could help compensate for the end of six-month exclusivity sales of the angina treatment drug, Ranexa generic (launched at the end of the December 2018 quarter).  Against this backdrop, analysts are now upgrading the stock. They expect a recovery for Lupin, besides a significant improvement in the company’s free cash flows (FCFs).

Analysts at Credit Suisse say, “While the concerns on Solosec ramp-up and margin contractions have played out, the stock is now ignoring sharp increase in FCF (3x over four years), with two strong products opportunities in Europe and the US.” 

The opportunities include generics of rheumatoid arthritis treatment drug, Enbrel for Europe. Being a limited competition product, the profit margins are expected to be high. Having approvals for Japan, Lupin is expected to get approval for the drug in Europe, too, during the second half of 2019-20 (FY20). In addition, it is also targeting approval for generics of Spiriva inhalers in the US. Both these approvals can add Rs 56 per share to the target price for the stock, even if the launches happen later, estimate analysts. Further, the company is targeting the launch of Albuterol inhaler during the second half, and with Levothyroxine (thyroid treatment drug) expected to gain market share of 5 per cent by the end of FY20, from about 2.1 per cent at the start of the financial year, these will add to its earnings. 

CLSA, too, expects strong improvement in cash flows for Indian companies, including Lupin. It expects combined FCFs for five Indian firms (Lupin included) to grow 3x YoY in FY20 itself, adding there is limited downside for Indian companies as cushion will be provided by domestic and emerging market growth (India likely to grow 10-12 per cent in FY20).