US business rebound key to further upsides in Lupin, VAI may offer relief

Clearance for Goa unit is positive; near-term triggers are new launches and market share gains

After a four-year wait, Lupin’s Goa facility was cleared by the US Food and Drug Administration (USFDA), with a voluntary action initiated (VAI) recommendation following an inspection in September. The facility had received a Warning Letter in 2017.

According to Siddhant Khandekar of ICICI Securities, the VAI could provide a significant respite in Lupin’s drive to address pending compliance issues. With the US contributing 38 per cent of total revenues in FY21, the inconsistent USFDA compliance track record of the company over the last four years had dented its prospects in that geography. He says that about 20 abbreviated new drug applications or ANDAs are awaiting approval from the site.

While brokerages are positive on the USFDA action, CLSA believes the importance of the Goa plant has declined over the years. From the US revenue perspective, the firm believes that clearance of the Pithampur-II (Indore) and Somerset (US) are more important.

While multiple sites are either under Warning Letter or Official Action Initiated status, Tushar Manudhane and Gaurang Sakare of Motilal Oswal Financial Services point out that a key product albuterol (inhaler) is being produced at the Nagpur facility and has an Establishment Inspection Report in place, which limits the downside on current revenue.

They expect the company to post a 21 per cent growth in net profit over the next two years led by a ramp up in market share of albuterol/arformoterol inhalers, new launches in the US and improved outlook for domestic formulations. After a flattish performance in October, the company’s performance improved in November with a 5 per cent growth.

Despite the recovery it trailed the overall pharma market growth of 6.6 per cent in the month due to muted performance of its anti-diabetic portfolio. Given that the chronic segment accounts for two-thirds of India sales, a sales rebound in the category would help the company post strong growth. Lupin has guided for double digit growth in domestic business in FY22.

The stock, which is down 27 per cent since the start of June, is trading at 23 times its FY24 earnings estimates. Given the challenges in the US business due to compliance, price erosion and launch uncertainty, investors should await a recovery before considering the stock.