We earlier recommended that investors hold on to the stock of Lupin, in bl.portfolio edition dated July 1, 2023, owing to a tentative turnaround in the US business. The stock has returned 80 per cent since then and is now trading at 32 times one-year forward earnings, which is a 20 per cent premium to its five-year average. Considering that the premium valuation is on a high base of earnings expected in next one year, which factors the optimistic prospects, we recommend that investors book profits from the stock at the current stage.

US operations

The US is the largest market for Lupin (37 per cent of sales in Q3FY24) and will continue to be so in the medium term. Compared to two years back, when five of its plants were under US FDA observations, Lupin has managed to clear three of them and the resultant flow of product launches has started from FY24.

The primary launch has been that of gSpiriva. The inhalation product approved for COPD had innovator-level sales of $1.2 billion. In the first year, even assuming nominal discount and penetration, Lupin should mop up $150-200 million. This is 20-30 per cent higher than earlier analyst estimates, as Lupin reported that neither an authorised generic (from the innovator) or other competition is currently anticipated. The company expects to gather 40 per cent market share within a year and to sustain the share without competition for at least two more years. For comparison, Lupin US sales in FY23 were $623 million.  

Complementing gSpiriva will be several other injectables, ophthalmics, and complex products. Key of those launches will be Bromfenac (launched), Mirabegron, Pegfilgrastim, Tolvaptan, Liraglutide and others. The pipeline also holds biosimilar Ranibizumab, and three other respiratory products, which are also large opportunities.

High base of operations

Lupin maintains that it can sustain its new base of $200 million per quarter in FY25-26 and given the strength of launches, the company can sufficiently meet the expectations. Assuming a 50 per cent chance of approval for new products in FY25, Lupin should scale back to $1 billion in sales from US in FY25 itself, a scale it last achieved in FY17 before facing headwinds.

From such base in the US, Lupin may find driving high growth in the US challenging. A nominal 5 per cent price erosion in base portfolio would imply that Lupin would need several blockbusters along with oral solid dosages and other generics to deliver even a single-digit annual growth. The current spree of launches was aided by the back-to-back plant approvals, which allowed for a slew of product approvals it had been working on in the backdrop.  

Concentration risk also runs high with Lupin. Three products in respiratory account for close to half of Lupin’s US revenues — gSpiriva, gAlbuterol and gBrovana. Any unexpected competition in any of the three can risk a steep fall in revenues and the valuation premium currently assigned.

India and Other markets

India accounts for 34 per cent of sales in Q3FY24 and EMEA, Growth Markets and RoW accounted for 10/9/4 per cent respectively. These segments are also in the midst of a revival currently, aiding the current valuation premium for Lupin. India has gained from sales force addition of 20 per cent in the last one year. Indian growth in FY23 was impacted by pricing restrictions and loss of exclusivity in diabetes therapy area.

With headwinds in the background and new approvals, India segment has reported 10 per cent YoY growth in 9MFY24. As the new sales force gains traction, India, in the short term, can sustain above-market-growth rates. The other three markets are also on a strong footing, aided by gFostair (respiratory product) launch gaining traction in European markets and product launches in other markets over a high base in FY23.

Finance and valuation

Lupin’s net debt has come down to ₹1,043 crore (0.28 times EBITDA) as of December ‘23 and the company is expected to be debt-free by year end. The strong cash flows have lowered the company’s leverage position. Lupin started the fiscal year hoping to exit with an EBITDA margin of 18 per cent, which it has achieved by Q3FY24. The margins had stooped to as low as 9 per cent in FY23 before the turnaround. Analyst estimates are now expecting another 200-300 bps improvement in the next two years as well, driving earnings growth of 130 per cent CAGR in FY23-25.

On the high base of expectations, the forward earnings multiple of 32 times FY25 earnings is at a 20 per cent premium to last five-year range. Earnings growth can be realised, driven by the launch calendar and margin expansion from the resultant operating leverage. But on such a high base, Lupin may revert to normalised single-digit earnings growth from FY26, which should result in tempering of valuations. Hence, investors can lock in on the gains and book profits now.