Lupin's loss is Aurobindo's gain

The surprise approval of Lupin's Suprax suspension generics to Aurobindo is positive for the latter

It is not common among Indian pharma peers that a generic approval of a drug has proved a boon for one and bane for the other. That seems to be the case with Lupin’s anti-bacterial brand, Suprax. As Aurobindo received the approval to launch generics of the Suprax oral suspension, its share prices touched all-time highs of Rs 1,432 on Thursday, while Lupin lost almost three per cent on the bourses, extending losses on Friday.

The reason: Suprax contributed the bulk of branded sales for Lupin, estimated  close to $80 million a year. Analysts estimate Suprax  accounts for $50-60 million in sales, with gross margin of about 90 per cent. Analysts at Nomura say after accounting for promotional expenses and taxes, they estimate the Suprax suspension would account for Rs 4-5 a share to Lupin’s FY15 earnings per share. For FY16 and FY17 earnings, it should be six-nine per cent and five-seven per cent, respectively.

However, Lupin is expected to launch authorised generics of the product as was the case after lipid-lowering brand Antara generics were approved. To counter the loss in Antara, Lupin, too, launched authorised generics and was able to manage the growth momentum. Now, the strategy for Suprax will have to be watched for.

For Aurobindo, it is definitely a positive development and will add to its earnings, since analysts were not expecting the approval to come so soon. Hitesh Mahida at Antique Stock Broking says Aurobindo can generate $20-25 million sales, being the first player to launch generics.

What’s more, this is the third product approval for Aurobindo in April. Analysts at Citi say a few positives over the past two weeks add to their confidence on Aurobindo’s growth and re-rating prospects.

Among other positives is settlement of a dispute with Plethico Pharma where Aurobindo is to get $23.3 million, which will strengthen its balance sheet.

While Aurobindo is estimated to continue seeing growth momentum in the US, a turnaround in the European business (after the Actavis acquisition a year ago) is also expected. Many analysts, thus, believe Aurbindo can now see a re-rating.

For Lupin, the correction in its share price offers a good entry opportunity into the stock. The company is also seeing strong momentum in the US and with Suprax going generic, Lupin might go for some brand acquisition and grow its brand business in-organically, believe analysts.

Analysts at Barclays say the Lupin management reiterated its $5-billion sales aspiration with inorganic growth a key component. They also add that approvals in the US might be nearing an inflection point, with Lupin expecting 25-30 approvals in FY16 and even more in FY17. As approvals rise, the company’s growth efforts are also towards strengthening its niche product portfolio and specialty-driven focus in dermatology, respiratory and other segments. After the Suprax event, while analysts at Kotak remain neutral, Nomura has a ‘buy’ rating and Barclays over-weight ratings on the Lupin stock.