Lupin: Positives priced in for now

Though it remains top pick in pharma space with distinct US product portfolio, near-term concerns on India and Japan businesses could keep stock under check

A few days earlier, Lupin marked its entry into the US ophthalmology segment with the maiden launch of antibiotic Gatifloxacin solution. The product is a generic version of Allergan’s Zymaxid Ophthalmic Solution, with a market size of $62.5 million. It was launched by Lupin on an 180-day exclusivity.

Hitesh Mahida at Fortune Equity Brokers expects the launch to add $11 million to Lupin's revenue and $7 million to profits during the six-month exclusivity. With this launch, the stock got fresh impetus — it has gained more than 10 per cent per cent in six trading sessions and scaled an all-time high on Thursday before closing at Rs 937.65.

Ophthalmology, a limited competition segment, has been long eyed by Lupin, which has been building a strong product pipeline. It has already filed for a little more than 10 products, to be launched after approval by the US regulator, the FDA. The limited competition segments provide sustained long-term revenue growth, with limited price and margins erosion. For instance, ophthalmology products have strict entry barriers in the $4.5-billion US market, in the form of clinical trial requirements for generic approval, difficulty in development and a dedicated facility requirement. Thus, the majority of generic ophthalmic products don't have more than two or three players in the market.

Gatifloxacin's launch marks the entry of Lupin into another limited competition segment, with a similar size as the $4-5 bn oral contraceptives (OC) segment, where it has already entered. A less contested space, oral contraceptives is growing at 10 per cent annually and remains a niche segment, requiring a high level of research and development expertise. Lupin's current ANDA filings in this space stand at 34,  the largest and most qualitative pipeline for the market. The company is likely to garner at least $100 mn from this segment during FY14, with some products already launched.

Though the launch of Gatifloxacin ophthalmic solution is a milestone, it was being anticipated for a while. Thus, analysts such as Sarabjit Kaur Nangra at Angel Broking  maintain their ratings on the stock. While Nangra maintains 'accumulate', with a target of Rs 904, Mahida maintains a 'hold' rating.

While the US business growth is likely to remain strong, growth in the domestic and Japanese businesses that had slumped in the June quarter is likely to remain muted. Analysts believe domestic growth might remain affected in the September quarter, too, thanks to the new pharma pricing policy. Also, growth in the Japanese business that contributes 12 per cent to Lupin's consolidated revenues will also have to be watched.

Arvind Bothra at Religare Capital Markets expects Lupin's September quarter profits to grow 40 per cent year-on-year, thanks to sustained market share gains in the lipid-lowering Tricor drug (31 per cent). However, excluding Tricor, growth would be constrained due to Lupin's Antara brand facing generic competition, the pricing policy's impact on domestic growth, and modest growth in Japan (hurt by adverse currency movement).

Hence, despite Lupin remaining one of the top pharma picks of analysts (along with Sun and Dr Reddy's), the consensus target price, from Bloomberg data (19  analysts polled since September) still stands at Rs 922, indicating limited upside.