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USFDA Pending Issues – A Key Overhang; Maintain REDUCE
Lupin (LPC) has delivered a muted performance in 2QFY20 led by lower-than-expected sales growth in the US. Adjusted for NCE licensing income, revenue grew by 7% YoY (-5% QoQ) to Rs42.2bn vs. our estimate of R Rs43bn. Its US business grew by 8% YoY to US$184mn vs. our estimate of US$205mn, while it declined by 16% QoQ due to non-recurrence of gRanexa exclusivity sales. India business grew by 11.5% YoY (+3% QoQ) to Rs13.4bn (in-line) due to new launches. We note that LPC has outperformed IPM over the last three quarters. On YoY basis, while APAC and EMEA geographies grew by 2% and 8%, respectively, LATAM remained flat. On the flip side, Japan business declined by 4.4% QoQ (in CC terms) led by pricing pressure. Gross margin down 100bps YoY and 115bps QoQ to 63.8% on weak product-mix. EBITDA margin remained flat on YoY basis at 13.9% (-555bps QoQ) vs. our estimate of 16.4% due to lower US sales (absence of high-margin gRanexa sales), which led to sequential decline in EBITDA and PAT. EBITDA and adjusted PAT declined by 32% and 9% QoQ to Rs5.9bn and Rs2.8bn, respectively. R&D cost increased t0 10% of sales vs. 8.7% in 1QFY20, which the Management expects to be <10% in FY20E and marginally increase in FY21, not exceeding 10%. We maintain our REDUCE our recommendation on the stock with a Target Price of Rs715.
Key Result Highlights
US Biz (32% of Sales):
(1) Cumulatively, LPC filed 427 ANDAs (Approved: 274; Pending: 153; FTF: 40 including 14 exclusive); (2) pricing in the US market has been stabilised at low single-digit;
(3) 3-4 key products are expected to be launched in 2HFY20E, while 15-20 product launches are likely in FY21E;
(4) gSpiriva: LPC is a sole FTF;
(5) gBrovana: Launch in 4QCY20;
(6) Etanercept: Europe launch expected in 2HFY20E;
(7) Fostair: Europe Launch is likely in 2HFY21E;
(8) branded business remained flat at US$5mn;
(9) gProair launch is likely by 1HFY21E; and
(10) Levothyroxine: all three RLDs are now approved; price erosion is low unlike other products, while ramp-up is ahead of schedule.
Solosec: The Management acknowledged slow progress in ramp-up of Solosec in the US. Solosec weekly prescriptions achieved at ~2,000 (vs. 1,800 in 1QFY20)), while breakeven for Solosec will be at 9,000-10,000 prescriptions/week. Solosec contributed US$5mn to LPC’s US sales in 2QFY20 vs. US$7mn in FY19. LPC expects peak sales target of US$150mn (15% market share) vs. current quarterly run rate of ~US$5mn. f
Warning Letter/Form 483 on Plants: LPC has been looking at much deeper quality transformation across all affected facilities. It expects US FDA re-inspection of two facilities (Somerset and Goa) by 1QCY20.
India Biz (32% of Sales): LPC’s branded business grew by 11.5% YoY, while generic business grew by x% YoY. The Management expects India business to grow by ~12% YoY in FY20E driven by chronic segment (60% of India sales).
Outlook & Valuation
Currently, LPC has OAI status for its 4 plants i.e.
(1) Mandideep Unit 1 (WL too; No new approval pending);
(2) Goa (30-40% of US sales; WL as well; 20 pending ANDAs);
(3) Somerset (~15-20% to US sales, ~40 ANDA pending);
(4) Pithampur Unit 2 (WL as well; 15-20 ANDAs pending; no new filings since WL). We expect the pending US FDA issues to remain as the key overhangs for the stock. We expect delay in resolving the pending regulatory issues to impact LPC’s overall sales/profitability. Hence, we maintain our REDUCE our recommendation on the stock with a revised Target Price of Rs715
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