Like many of its peers, drug major Lupin also felt the regulatory heat last year. The US FDA raised concerns about the company’s Goa facility in March this year; Lupin has provided a response and followed it up with an update.
Despite strong March 2016 quarter results announced recently, the stock has fallen 12 per cent since. The market seems to have been spooked by the post-results announcement of site transfer of select products from Goa to the company’s other facilities.
While the company may be doing this to safeguard against regulatory risks, the market seems to be interpreting the move as a sign of trouble at the facility. Last week, to Lupin’s credit, FDA closed its observations after audits in early 2016 at the Aurangabad and Mandideep facilities. The stock, which now trades at ₹1,480, is down 15 per cent over the last year. It currently trades at 29 times its trailing 12-month earnings, at a slight discount to its three-year average. Investors can adopt a wait-and-watch approach for now. The risk of a run-in with the US FDA can weigh on the company’s performance. On the other hand, the recent acquisition of the US-based Gavis can provide a growth kicker.
Lupin’s robust growth numbers in the March quarter may not be sustainable over the next few quarters, on two counts. First, its Goa facility inspection by the US FDA could throw up unpleasant surprises. While in the past, it took pharma companies about a year’s time for completing resolution, the timelines have extended to over two years of late.
Two, new product filings and deferment of launches due to site transfer from the Goa facility can postpone revenue growth.
Having contributed 43-47 per cent of sales in the last three years, the US continues to be a key geography for the company’s growth plans.
The completion of its acquisition of Gavis for around $880 million in the recent March quarter can aid revenue growth. The company’s revenue grew at an average annual rate of 23 per cent between 2012 and 2014 to $96 million, while operating profit grew at a much stronger 36 per cent to $35 million.
Now renamed Lupin Somerset, the company is manufactures and distributes various pharmaceutical products.The company has a strong compliance record with US regulators. Out of 102 products that have been filed, 44 have received the regulator’s nod, while 58 are pending.
Also, 105 products of Lupin are awaiting approval from the US drug regulator; this can help the company sustain growth in the long term.
Thus, clarity on the Goa facility inspection outcome and the post acquisition performance of Gavis are the key triggers for the stock.
Tepid performanceThe strong March 2016 quarter was propelled by a surge in sales from the US geography; Y-o-Y revenues grew 54 per cent to $325 million. New product launch of anti-diabetic drug Glumetza and growth in Fortamet volumes contributed to this strong show.
While March quarter was robust, annual performance was tepid. Consolidated net sales grew 8.7 per cent Y-o-Y to ₹13,701 crore in 2015-16 while net profit fell 5.5 per cent to ₹2,270 crore. The fall in the bottom-line was due to manufacturing and employee costs climbing 4 per cent and 20 per cent, respectively.
While revenue growth in the US was flat Y-o-Y with sales of $887 million in 2015-16, the company’s domestic revenue grew 14 per cent to ₹3,392 crore on the back of 19 brand launches and increase in sales force by about 1,000.
The company, which was debt-free in 2014-15, now has a gross debt-equity ratio of about 0.65 times. Interest cost can make a dent in the net margin in the coming periods. So can higher R&D spend, and amortisation costs related to the acquisition. That said, the management expects the Gavis acquisition to be earnings accretive immediately.