Pharma stocks did well and outperformed the market over the past year, thanks to the strong growth, both in the home market and key overseas geographies, such as the US. Pharma major Lupin’s stock has more than doubled since our last buy recommendation in December 2013. A strong distribution franchise and product offerings in the US and India enabled the company grow its revenue and profit at a good pace.

Lupin’s large pipeline of over 95 products awaiting approval from the US drug regulator, Food and Drug Administration (FDA), should help the company sustain growth in the medium-to-long term. However, its growth prospects may remain subdued over the next few quarters on two counts. First, the US FDA has approved Aurobindo Pharma’s generic version of Lupin’s anti-infective drug brand Suprax (cefixime). Suprax was the sole cefixime drug sold in the US until recently. The launch of generic Suprax by Aurobindo will eat into Lupin’s revenue and profit.

Second, though Lupin has a healthy product pipeline in the US, the average lead time for new product approval by the FDA has increased significantly over the last few years. Given the company’s large revenue base in this geography, speedier product approvals will be critical to sustaining profitability.

Following the strong rally over the past year and the near term concerns, the stock’s performance may remain muted in the short term. Despite the 12 per cent fall last week, the Lupin stock trades at almost 30 times its 2015-16 estimated earnings, implying a 10 per cent premium to larger peer Sun Pharma. While investors can continue to hold the stock, fresh exposure can be avoided at these levels.

Rising competition

Lupin’s branded business in the US accounts for about 5 per cent of its total revenue. But the contribution at the operating profit level is much higher, thanks to the attractive margins on its branded products. After its cholesterol-lowering brand Antara went generic in 2013, Suprax accounted for almost 95 per cent of the company’s US branded sales. Ergo: Lupin depends heavily on Suprax at present.

Last week, the US FDA approved Aurobindo’s generic version of Suprax suspension (liquid form), paving the way for competition in the drug.

Efforts by Lupin to manage Suprax’s life cycle by developing other versions of the drug such as oral tablets, chewable tablets and drops have not been very successful. Suprax suspension continues to account for almost 80 per cent of the brand’s revenues. With generic competition in its flagship brand, the dent in Lupin’s revenue can possibly be made good only by inorganic initiatives such as brand acquisitions. Until then, profitability may see a moderation.

Delayed approvals

Apart from this, Lupin’s generic business in the US (about 45 per cent of overall revenue) is facing the heat due to long approval lead time by the US FDA. For instance, the company did not receive any product approvals in the December quarter and hence could not launch new drugs. This led to a slowdown in revenue growth in the US to 4 per cent, from high double digit levels. As a result, overall revenue grew a weak 5 per cent.

However, the company has managed to get three product approvals from the US FDA in the first three months 2015.

Despite growth hiccups in the US market, Lupin continues to grow at a healthy pace in the domestic market and other emerging markets such as South Africa, which account for over a fourth of its revenue.

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