The Hindu Business Line : Lupin: Buy

Good revenue mix in domestic and export markets, strategic acquisition in Japan and vertically integrated model will help deliver sustainable growth over the long term

Healthy growth both home and abroad.

Kumar Shankar Roy

Investments with a two-year perspective can be made in the shares of pharma company Lupin, whose sales have grown by 14 per cent and profits by 33 per cent on a compounded annual basis over the last five years. Lupin is one of the few drug makers that has consistently grown both in India and abroad.

Today, for every Rs 10 earned by Lupin and its subsidiaries, international revenues account for Rs 6 while the domestic business chips in with the remaining Rs 4.Formulations or finished dosages have been one of Lupin’s growth drivers in regulated markets such as the US and UK.

Lupin’s core strengths lie in high-value therapeutic areas such as anti-infectives, cephalosporins and pain management; while it diligently invested resources to focus on research and development on niche intellectual property (earned Rs 240 crore as R&D licensing income in 2007-08).

With Lupin now entering Japan, the world’s second largest pharma market, it adds a crucial geography to its basket of advanced markets.

Valuation

At the current market price of Rs 532, the Lupin stock trades at modest valuation of 13 times its likely 2008-09 earnings per share. We reiterate our ‘buy’ on Lupin (read Business Line, October 28, 2007) even as we note the 14 per cent correction in the stock price, in line with the broader markets. A good earnings track record and bright prospects are compelling reasons for an investment.

Domestic growth

Lupin is expected to finish 2007-08 with strong numbers. Its balanced portfolio of drugs catering to domestic formulation market has helped it to garner steady growth of over 20 per cent. The life-style disease management segments such as cardiovascular (having top brand Tonact), anti-asthma, diabetes care, etc, account for more than half of Lupin’s domestic business.

Lupin may want to diversify its product basket in a scenario where a similar thrust by competitors in the lucrative lifestyle segment will lead to heightened competition. This is why Lupin, which recently launched its cancer care and diabetes care businesses (now ranking among the top ten in sales), also has its eyes set on areas such as neurology and cardiology, which are less crowded but high-value segments.

The company’s position in legacy anti-TB drugs would continue to remain strong. With sufficient manufacturing facilities to cater to new segments, Lupin’s capital expenditure would be limited to periodical upkeep only, thereby making few demands on its balance sheet.

Lupin’s US portfolio of drugs target both seasonal ailments such as flu with antibiotics (Suprax) and perennial ones to treat hypertension and heart-attacks (Lisinopril). Products like Suprax being branded enjoy hefty margins while Lisinopril has been able to maintain market leadership, assisting Lupin to clock over 150 per cent growth in generic business last quarter. Around 28 products are awaiting US regulator’s approval which would provide key support to the US business.

Importantly, Lupin has not made any major acquisition in the US. Any such acquisition of a company with the right kind of product basket would be a key trigger for the stock.

Japan is the future

In October 2007, Lupin acquired nearly 80 per cent stake in Japanese company Kyowa to ramp up product launches to over six an year, from around three earlier. Japan is poised to embrace the cheaper drugs in a big way as its government is trying hard to reduce healthcare (publicly-funded) costs.

While Kyowa offers significant synergy in terms of manufacturing and research, Lupin plans to transfer portions of manufacturing sites to India (to be complete in 12 months) to leverage India’s low-cost advantage, thereby boosting Kyowa’s margins over 18-20 per cent.

Risks

Lupin’s business model is dependent largely in two geographies, the US and India. Unfavourable policy-related and regulatory issues may affect earnings prospects adversely.

Fruits from acquisitions may be delayed due to slack in integration, both in cases of Japan’s Kyowa and India’s Rubamin (intended to be a contract manufacturing vehicle).

Near-term margins and profitability may be strained due to acquisitions.

Quarterly performance may not be indicative as a portion of business is seasonal.

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