Lupin posts net loss of Rs 127 cr, US market holds key to firm's rerating

Lupin’s September 2019 quarter (second quarter, or Q2) numbers were boosted by Rs 144 crore of income earned from licensing out a new chemical entity, but one-offs (Rs 546.5 crore) related to US lawsuits and losses on divestment in Japan pulled down the overall performance.

As a result, while profit before tax and exceptional items was up 3.6 per cent year-on-year (YoY), Lupin posted a net loss of Rs 127 crore in Q2 versus a net profit of Rs 266 crore in the year-ago period.

Among geographies, North America seems to be stabilising, with sales up 6.1 per cent YoY. Though the same is down sequentially, it is mainly due to the end of the exclusivity period for sales of angina treatment generics of Ranexa.

Domestic sales, contributing 31 per cent to overall revenue (equal to US market’s contribution), clocked 11.5 per cent growth and emerging markets grew 8.3 per cent, providing impetus to overall sales.

Thus, consolidated revenues at Rs 4,360 crore came close to Bloomberg consensus estimate of Rs 4,396 crore. However, net profit before exceptional items at Rs 258 crore fell by 2.9 per cent YoY and was short of estimates of Rs 295 crore, as the end of Ranexa exclusivity impacted margins, say analysts.

While pricing pressure in the US generics market remains in low single digits, large product approvals are crucial to boost sales. Although Lupin expects a better second half for thyroid treatment generics of Levothyroxine, approval of generics such as respiratory product ProAir is crucial, given analysts were expecting a contribution of $50 million to Lupin’s 2020-21 (FY21) revenues and about 8-10 per cent to earnings, from this drug.

Lupin expects the approvals by the end of the financial year and launch during the first half FY21. However, resolution of US Food and Drug Administration issues, too, remain an important growth trigger, given Lupin’s three domestic plants are under warning letter and a US facility under official action initiated status (indicating objectionable conditions/practices), which is keeping analysts cautious about the company.

During Q2, Lupin sold its Japanese arm, Kyowa CritiCare, and absorbed resultant loss on divestment of Rs 167.3 crore. Due to pricing pressure, profitability of this business was impacted despite integration of manufacturing operations in India, say analysts, who believe the sale is in the right direction.

Overall, while divestment in Japan and growth in the domestic market are positives, Bhavesh Gandhi at YES Securities, said he thinks the US business remains challenging and has retained a negative stance on the stock.