Pharma major Lupin Ltd has reported a 31 per cent decline in consolidated net profit in the second quarter of 2017-18 to Rs 445 crore as against Rs 662 crore seen in the same period last year. The fall in net profit was mainly attributable to a high base and continued double-digit price erosion in key products such as Glumetza and Fortamet in the US market. The consolidated net sales for the quarter decreased by 8 per cent to Rs 3,874 crore, from Rs 4,211 crore for the same period last year.

Despite that, post announcement of the Q2 results, the stock of Lupin rose as much as 9 per cent intraday on Monday, indicating improved investor confidence about the growth story resuming in the company. The company reported strong growth in key markets other than the US in the second quarter.

Weak US growth

Lupin’s sales in North America fell by 32 per cent year-on-year (YoY) in the second quarter to Rs 1,361 crore. As guided earlier, the company’s business in the US witnessed significant pressure on the back of price erosion and increasing competition from higher ANDA approvals.

The US market accounts for 35 per cent of the company’s total revenues. Thanks to the growing opportunity in the generic space in the US, the company had registered strong growth in the US over the last few years.

However, the US business has been contracting for the last few quarters due to price erosion in its base business, caused by channel consolidation (distribution of pharma products in US getting concentrated among few large companies) and increased competition. The company has been reporting a sharp sequential decline over the last four quarters, due mainly to the expiration of exclusivity on Glumetza — one of the key generics in its US metformin portfolio (prescribed for diabetes). The loss of market share in Glumetza led to a sequential decline in the second quarter as well. Lupin’s US business is likely to remain under pressure in the near term due to the tough pricing environment in most products in the US generics market.

However, the company is confident of recovery in US growth in FY-19 on the back of new launches, including FTF opportunities. With 49 First-to-Files products, including 25 exclusive FTF opportunities, Lupin has one of the strongest ANDA pipelines among its peers. The management guided for 30-35 new product launches in FY18, which could offset base business erosion going forward. The company has indicated the near-term launch of key generics in the US, including Tobi in the third quarter and Tamiflu in the fourth quarter. The other key launches lined up in FY19 are Solosec, Coreg CR, Prevacid ODT, Lialda, Axiron, Levothyroxine and Ranexa.

The company is focusing on building a pipeline of niche products with limited competition and high barriers, such as inhalation, biosimilars and complex injectables. Further, the shift in the strategy towards acquiring speciality and niche technological platforms for the regulated markets from its earlier strategy of geographical expansion, should help the company prop up its business significantly.

In line with its decision to focus on cost control, the company has reduced R&D spend on drug discovery, while rationalising its pipeline and getting a financial partner for its biosimilar development. The company has reported R&D expenditure for the second quarter at 12.2 per cent of sales, down from 13.6 per cent last year.

Other markets

The formulation business in India that accounts for 30 per cent of Lupin’s global sales increased by 16 per cent YoY in the second quarter to Rs 1,159 crore, helped by recovery in the domestic business post GST. Given its domestic portfolio, which is skewed towards the high-margin chronic segment, the overall revenue of the company is well supported.

Lupin’s business in Japan reported growth of 30 per cent YoY in the quarter, while sales from Latin America increased by 42 per cent YoY.

Other metrics

Lupin is well-placed on the regulatory front when compared to its peers. USFDA EIR clearance is expected for the company’s Pithampur and Goa facilities in the coming months.

Operating profit for the quarter stood at Rs 927 crore due to lower sales. Operating margins came in at 24 per cent, down 120 bps from the same quarter last year.

At the current price (Rs 1,027), the stock trades at 25 times its trailing 12-month earnings — at around 14 and 30 per cent discount to its large-cap peers Sun Pharma and Dr Reddy’s Labs.

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