Pharma stocks have been on the backfoot for some time, due to stringent regulatory scrutiny by the US drug regulator FDA. The recent weakness on the bourses have added to the pain. But this presents good buying opportunities in fundamentally sound stocks for investors with a long-term perspective.

Generic major Lupin, for instance, has fallen close to 21 per cent year-to-date. The valuation seems attractive. At ₹1,445, the stock trades at about 19 times its estimated earnings for 2017-18, a 10 per cent discount to its historical three-year average and also to peers such as Dr. Reddy’s Labs and Cipla. The company’s prospects look robust with regulatory clearances, increasing scope for generic drugs and presence across high-potential markets.

Regulatory clear Unlike some of its peers, Lupin is well-placed on the regulatory front with its facilities receiving the all-clear. Early in the calendar, observations by the FDA regarding the company’s Mandideep and Goa facilities saw the stock lose much ground. But in May and November, these concerns were removed with the regulator issuing establishment inspection reports (EIRs) indicating that the issues had been resolved. With the Mandideep and Goa facilities accounting for more than half the company’s US sales, this is a key boost and should accelerate launches and product approvals.

Big opportunities Lupin derives more than 90 per cent of its revenue from formulations, primarily generics, and the rest from APIs (active pharmaceutical ingredients). The US market accounts for about half the revenue. The company is clocking strong growth in this market, thanks to the consolidation of its Gavis acquisition and also due to the growing opportunity in the generic space. Lupin is the fifth largest player in the US generics market with market share of about 5 per cent in prescription. The US opportunity is expected to grow at a healthy pace with several products expected to go off-patent over the next five years.

Lupin now has 124 products in the US market. With 338 filed ANDAs (abbreviated new drug applications) and 142 ANDAs pending approval, including 45 FTF (first to files), the company has one of the strongest pipelines in the US among Indian pharma companies. The management expects to launch 30-plus products in 2017-18, with similar numbers ahead. The company is also focusing on building a pipeline in niche products with limited competition and high barriers, such as inhalation, biosimilars and complex injectables.

Lupin is also doing well in India that contributes nearly a quarter of the revenue. With more than 6,000 market representatives, the company is among the fastest growing pharma majors in domestic formulations. Despite about a quarter of the domestic portfolio being under the NLEM (National List of Essential Medicines) and thus subject to price controls, the growth momentum in the market should sustain with launches, coupled with additions to the sales force. Tie-ups with global majors such as Eli Lilly should aid domestic growth.

Lupin is also growing its presence in Japan, the second largest global pharma market, where increasing patent expiries should aid generic players. The inorganic growth strategy being replicated in Japan should help Lupin scale up quickly. The company also has good presence in Europe and South Africa.

The company’s focus on research and development (about 12 per cent of revenue) should hold it in good stead. The focus on chronic therapy drugs should also aid margins.

Strong financials Lupin’s revenue and profit grew at an annual average rate of 19 per cent and 21 per cent respectively over the past five years. The company clocked revenue of about ₹13,700 crore and profit of about ₹2,271 crore in 2015-16. Operating profit margin (about 24 per cent) and profit moderated in 2015-16 due to spends related to the Gavis acquisition. In the first half of 2016-17, revenue growth was robust at about 36 per cent year-on-year while net profit rose 56 per cent. This was thanks primarily to a good show in the US market due to the Gavis consolidation and good sales of anti-diabetic drugs Glumetza and Fortamet. Operating margin revived to about 26 per cent from 21 per cent in the year-ago period. Increasing competition in Glumetza and Fortamet could dent revenue and margins on these products but this should be offset by good offtake in other products such as Methergin, used in post-delivery treatment. Ramp-up in the Gavis portfolio should also aid revenue growth.

Lupin has a strong balance sheet with consolidated debt-to-equity less than one time.

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