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Lupin – Stock of the Month (March 2017)

Date: 13 February 2017

Price: Rs. 1,452.50

lupinLupin Limited (“Lupin” or the “Company”) is a pharmaceutical company producing a wide range of quality affordable generic and branded formulations and Active Pharmaceutical Ingredients (APIs). The Company was formerly known as Lupin Chemicals Ltd. and changed its name to Lupin Limited in 2001 as a result of its amalgamation with Lupin Laboratories Ltd.

67% of the overall business of the Company comes from International Markets. Lupin’s global formulations business constitutes close to 84% of it’s overall business mix, and in terms of geographies, USA is its largest market outside India. The Company operates a globally integrated network of 11 manufacturing facilities spread across India and Japan. Lupin is the 7th and the 9th largest generic pharmaceutical company by market capitalization and sales globally.

INVESTMENT RATIONALE

Robust Financial Metrics

Lupin has shown consistent growth over the last five years (i.e. 2011-12 to 2015-16). It’s net revenue from operations over this period grew at an impressive CAGR of 18.50 %. Lupin has reserves in excess of Rs 10,984.37 Cr.

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lupin geographyU.S. Generic Business Main Growth Driver

Lupin’s U.S. business (~43% of total turnover) is witnessing a shift from branded to generics. The U.S. generics business record revenue contributes 95% of the Company’s U.S. sales. Lupin is the 5th largest pharmaceutical player in the U.S. (4.68% market share by prescriptions).  In FY 2016, the Company completed its acquisition of U.S. based Gavis Pharmaceuticals LLC and Novel Laboratories Inc. which has been renamed Lupin Somerset.

The acquisition enhanced Lupin’s scale in the U.S. generics marketplace and also broadens the Company’s pipeline in dermatology, controlled substance products and other niche, high-value complex generics and specialty segments. The Company has a portfolio of 128 in-market products and 163 filings pending approval.

Lupin expects to launch around 25 products in the U.S. in the FY 2018.

Steady Growth in Indian Formulations Market

Lupin’s India business continues to witness strong growth, outpacing and outperforming the Indian Pharmaceutical Market (IPM). Lupin’s India business posted revenue of Rs. 3391.6 Cr. in FY 2016, a growth of 14% over the previous year. India contributes 25% of the company’s global revenue.

Therapy Area

Lupin Rank

Market Growth (%)

Lupin Growth (%)

Lupin Market Share (%)

Anti-TB

1

(2.1)

(0.3)

56

Cardiology

2

14.6

16.6

6.4

Respiratory

3

11.2

18.1

4.9

Anti-Diabetic

5

20.5

17.4

6.2

Neuro / CNS

8

15.9

7.5

2.4

Anti-Infectives

11

8.0

6.2

3.3

Gastro-Intestinal

12

15.6

22.0

2.3

Chronic and semi-chronic therapy segments contribute 87% of Lupin’s overall India revenues. The Company today has 3.3% market share and is the eighth largest player in the IPM. In FY 2016, the Company created 5 new business divisions to cater to high growth therapies and launched 19 brands. Lupin also added and operationalized 3 new manufacturing facilities (2 Formulations and 1 API facility) in India to meet future market demand.

Increased Focus On R&D/Inorganic Route 

Management in the annual report (FY 2016) has highlighted its thrust on transforming into a complex generic company and growing via acquisitions. The Company intends to continue with its acquisition strategy and expand in Asia Pacific (APAC) and Europe, Middle-East and Africa (EMEA).  R&D investments (including amount capitalized) have increased significantly from Rs. 11.2b (9% of revenue) to Rs. 17.3b (12% of revenue).  Further, in FY16, the Company focused on growing inorganically and made three acquisitions (including one large acquisition of Gavis for U.S. $880m).

INVESTMENT CONCERNS

Stringent Regulations

The U.S. Food and Drug Regulators (USFDA) have recently rejected many products due to reasons varying from products. More stringent safety regulations with stricter policies in terms of quality standards, supervision and sanctions perpetually present an ongoing threat for pharma companies.

Delay in key approvals from US FDA

The Company expects the U.S. generic business to witness revenue CAGR of 19% over FY16-18, led by the launch of important limited competition products in the U.S. Any delay in approval/launch of those products is likely to have a material impact on the sales forecasts for the U.S. and overall earnings growth for the Company.

Delay In Margin Improvement Due To Shift In Production From Japan to India

Lupin is in the process of gradually shifting a part of its API/formulations sourcing from its facilities in Japan to India, which is expected to reduce the cost of sales for the Company. Currently, Lupin is sourcing three APIs from India. Over the next two years, it expects significant increase in the number of APIs sourced from India and these may include a few finished formulation products. Any delay in sourcing production from India may lead to delay in improvement in margins for Japan operations.