The Hindu Business Line : Lupin: Buy

Even as Lupin's initiatives in the developed markets show signs of paying off, the stock is available at a valuation of about 16 times its expected per share earnings for the ongoing fiscal which, in our view, is relatively attractive vis-à-vis its peers in the mid-cap space such as Glenmark and Cadila.

Our current recommendation represents a continuation of the positive stance we have on the stock, since our earlier `buy' call last December at Rs 720.

Though the stock has remained almost flat since then, it did move up close to the Rs 800-mark in the recent past, before shedding some of those gains.

We believe that any further weakness in the stock, linked to bearishness in the broad markets, may serve as a good entry point into what is a good play on the mid-cap pharma theme.

A look at the numbers

In FY-05, having to commit funds upfront — leading to a lack of synchronisation between costs and revenues — to enter the developed markets and weak pricing trends in a key product line came as a double whammy to Lupin's bottomline.

However, this year, the situation has changed and Lupin is gradually reaping the benefit of the costs incurred last fiscal.

It turned out to be a robust second quarter for Lupin, building on the smart performance it turned in during the first quarter.

Sales at Rs 405 crore grew by a strong 34 per cent on a year-on-year basis. Revenue growth was achieved by a solid showing in both the developed and developing markets, with the former witnessing significant traction.

In the key markets of the US and Europe, total revenues at Rs 98 crore were up 86 per cent on a year-on-year basis. Formulation (medicines in finished form) sales did the star turn, registering a more than 40-fold jump at Rs 51.4 crore.

The key drivers behind the manifold jump in formulation sales are the launch of Ceftriaxone (in an alliance with Baxter) and an improvement in the showing of Suprax (a paediatric drug).

Lupin's domestic market performance has also been good, with revenues growing 24 per cent at Rs 233 crore. This also indicates the improvement in the pricing environment in Lupin's crucial cephalosporins portfolio, prices of which ruled considerably weak in the previous fiscal.

The strong performance has also rubbed off positively in operating margin by imparting an upward bias. At close to 17 per cent, the margins are good a 600 basis points higher than in the year-ago period.

As Lupin broadbases its product offerings in the domestic market and its developed market foray acquires scale, we believe that the trend in margins will be maintained.

In spite of a sharp rise in the incidence of taxation — up 25 per cent compared to 9 per cent in the year-ago period — that can be attributed to a greater contribution from the domestic business that is not entitled to tax-breaks, Lupin's earnings leaped by 158 per cent at Rs 45 crore.

The road ahead

Given its established strengths in the area of fermentation, we expect Lupin to cash in on the opportunities emerging in the statins space in the US, when a couple of blockbuster drugs go off patent the next calendar.

We also see the developed markets increasingly contributing to revenue ; this should also provide a fillip to margins.

Lupin has also tied-up with partners across different geographies, as it seeks to widen its footprint.

It has an alliance with Kyowa for the Japanese market, with Aspen and Ranbaxy to address the tuberculosis market in various parts of Africa; and has recently inked an agreement with GlaxoSmithKline to market its anti-TB products in the Philippines.

Such alliances may also well turn out to be a harbinger of contract manufacturing deals.

Lupin is also focussing on building intellectual property through its new chemical entity research. It has outlicensed an anti-infective novel drug delivery system to Cornerstone of the US on a milestone-payment basis.

Lupin also has new molecules addressing the migraine, TB and psoriasis segments, which are in different stages of development.

Though no upsides from such product launches can be captured now, positive news flow on these products should impart momentum to the stock.

The key risks to our recommendation would be a greater-than-expected erosion of prices in the Ceftriaxone market; any downward revision in the prices of its key products in the domestic market by the Pharma Pricing Authority of India; and, given the focus on the American market, any adverse movement of the rupee vis-à-vis the dollar.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page