Strong drug pipeline, stable base in US brighten Lupin's prospects

Expanding domestic portfolio, ability to maintain market share in current products and new launches are key growth triggers

Lupin stock touched its all-time high on Thursday (Rs 904.95) on the back of sustained US growth momentum, and product pipeline and initiatives in the domestic market. The stock, which ended the day at Rs 890 with gains of 2.3 per cent, has risen 10 per cent over the past month.

In the US market, since December 2012, Lupin has posted a 40-80 per cent growth rate on the back of new launches, as well as growing sales of its existing drugs. For May, the company has posted growth of 50 per cent year-on-year in US sales. The outlook is also good. On the whole, Lupin has one of the strongest pipelines of 18-20 products for the US market over the next 18 months.

Lupin is also gradually expanding its domestic portfolio through expansion into more segments and tie-ups. On Thursday, it announced a non-exclusive tie-up with US-based Merck Sharp and Dohme (MSD) for marketing the latter's pneumococcal vaccine (preventive care for diabetes and, chronic heart, lung and liver diseases) for adults.

Given its growth, Bank of America Merrill Lynch analysts believe the valuation multiple at 20 times FY15 earnings estimates is likely to expand (closer to larger peers) due to stronger and sustainable growth rates, both on the net profit front (22 per cent annually over the next two years) and return ratios, expected at 30 per cent versus 26 per cent for the peers. Most analysts have a target price of Rs 875-900 for the stock. Though a re-rating could be on the cards, given the surge in share price, investors should look at corrections to add the scrip to their portfolio.

Robust US sales continue
Despite the 51 per cent rise in share price over six months, most analysts continue to be bullish on the company due to its strong showing in the US market. Among leading Indian pharma majors, this geography contributes nearly 40 per cent of its revenues, second only to Sun (43 per cent) and a good performance rubs off well on the company's overall show.

About half its US sales are contributed by Antara, the generic form of the cholesterol lowering drug Tricor, antibiotics Suprax and Cefdinir and the generic form of antipsychotic drug Geodon. Among other segments expected to drive growth are oral contraceptives ($100 million estimated sales in FY14), dermatology, ophthalmology and asthama.

Eyeing cholesterol control segment
The lipid control or cholesterol lowering segment is emerging as a key growth driver for Lupin's sales in the US. The first among three products is Tricor. The Lupin stock had corrected about five per cent in May on the announcement that Mylan would launch the $1.2 billion (Rs 7,200 crore) drug in tablet form.

Lupin has been able to maintain its generic market share so far with a share of 34 per cent vis-a-vis Mylan (market share of one-two per cent). While Balaji Prasad and Rohit Goel of Barclays estimate the drug will contribute about $29 million to Lupin's revenues in the June 2014 quarter, Ebitda margins are expected to expand by 210 basis points, feel analysts at Kotak Securities.

Though the launch of generics in capsule form by Mylan has to be watched carefully, Lupin's Antara, along with authorised generics, continues to dominate with 70 per cent share, observes Hitesh Mahida at Fortune Research.

In addition to Tricor, two other products in the cholesterol lowering segment the company is eyeing are Trilipix and Niaspan. Instead of a launch in January 2014 as was anticipated earlier, the company is now likely to launch the generics version of this $550 million drug Trilipix this month.

While the company says it is mulling options about the launch, Edelweiss analysts believe an early launch is likely to add $11 million in FY14 and about $15 million in FY15 to the company's revenues. The third drug in this segment is Niaspan, to be launched in March 2014 and expected to add about $35 million to the company's revenues in FY15. Together, the three cholesterol controlling drugs are expected to contribute $85-90 million to FY15 sales for Lupin.

Meanwhile, for the quarter ending June, analysts at Nomura see revenues for the company at Rs 2,547.2 crore growing at 14.8 per cent year-on-year, with Ebitda margins at 30.8 per cent (up 287 basis points) and net profits growing 27.4 per cent to Rs 357.3 crore, compared to the year-ago period.