Lupin: Hold

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Strengthening presence in key markets to pay off.
Strengthening presence in key markets to pay off.

Sustained growth in formulations exports and attractive product pipeline are positives.

Srividhya Sivakumar

Shareholders can remain invested in the stock of Lupin. Though the stock price has more than doubled since the last ‘buy' recommendation in August 2009, the sustained traction in its formulations exports and an attractive pipeline of products make a reasonable case for remaining invested. That the company has managed to keep up its earnings momentum too provides confidence.

The stock appears to have priced in most of the positives. At the current market price of Rs 1,915, the stock trades at about 20 times it likely FY-11 per share earnings. Though this is at a discount to the valuations of sector leaders, that it is at a premium to sector valuations means limited room for appreciation in the near term.

Impressive performance

In the year-ended March 2010, the company reported a revenue and profit growth of 26 per cent and 36 per cent respectively. Operating margins increased to 21.1 per cent from 19.7 per cent seen last year.

The management expects a topline growth of 25 per cent and a 100 basis points expansion in operating margins in the coming year. This seems achievable given the company's strengthening presence in US branded generics business and likely growth in key markets of India and Japan.

Strong US presence

Unlike some of its peers, Lupin has a front-end marketing presence in the US. This seems to have helped it a great deal in capturing market shares, as 12 out of 25 generic products its markets in the US enjoy the highest market shares. It enjoys a significant share in the prescription market too and is ranked the eighth largest generic player in terms of prescriptions (last year it was in the ninth position). Such entrenched presence in the US market gives Lupin a good vantage to benefit from the increasing genericisation in the market.

In the year gone by, its US business reported a revenue growth over 39 per cent (74 per cent growth last year) and made up 52 per cent of the company's international business (48 per cent last year). It filed 37 ANDAs (abbreviated new drug applications) and 19 DMFs (drug master filings) with the USFDA during the year, growing its current pipeline to over 86 products (likely launches in 3-4 years).

It also has about a dozen FTFs (first-to-file) opportunities lined up (three exclusive), providing it with a reasonably strong revenue visibility over the next couple of years. Key products such as Lotrel, Antara, and Suprax are likely to be the main revenue drivers.

While Suprax would soon go off patent and may see a fall in contribution, the planned brand extensions and the likely launch of Allernaze in August 2010 in the branded segment could help offset that to some extent. The company expects to launch six generic products this year.

Its presence in the high-margin oral contraceptive (OC) segment too could see revenue inflow next year onwards. It has already made 22 filings in the OC category and expects to file additional products this year. While international business continues to be its key revenue driver (49 per cent of total revenues), Lupin also has a fairly strong presence in domestic formulations (27 per cent of revenues).

Growth potential

The segment reported a growth of over 18 per cent led by increasing market share in the CVS, diabetes, CNS, asthma and gastro therapy segments. The company expects the business to grow at a rate 2-5 percentage points higher than the industry.

Lupin's presence in Japan, touted to be the next big market for generics, by way of an earlier acquisition of Kyowa provides it an added growth avenue.

With not many Indian generic companies present in country, Lupin appears well-positioned to make inroads. It managed to grow its revenues in the region by over 21 per cent last year; Japan now makes up over 11 per cent of the company's total revenues.

Here again, its products (Amlodipine and Risperidone) continued to maintain majority market share; Kyowa launched four new products last year.

While slowdown in Japanese market and lack of new blockbusters going off patent did take a toll on its revenues (little growth in the last two quarters of last year), the region has the potential to grow into a significant revenue contributor in the next couple of years.

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(This article was published in the Business Line print edition dated July 11, 2010)
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