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Margin pressure continues; triggers for US awaited…

About the stock: Lupin is a multinational pharma company engaged in manufacturing & marketing branded & generic formulations, APIs, biotech products as well as OTC medicines across multiple dosage forms & therapeutic categories

It is the third largest generic player (by prescriptions) in the US with 168 generic products (market leader: 52 products; Top 3: 122 products) along with being the sixth largest company in the Indian pharmaceutical market

Lupin is recently going through a rough patch, especially on the US generics front due to plant compliance issues besides margins pressure

Q3FY22 Results: Lupin’s revenues were in line driven by India and US while margins were impacted due to one-off expenses and continued price erosion in US

Sales were up 3.6% YoY to | 4160.9 crore

EBITDA was at | 370.7 crore, down 52.4% YoY with margins at 8.9% (ex-onetime expense EBITDA margins ~ 13.6%)

Adjusted PAT was at | 548.6 crore (up 25.2% YoY)

What should investors do? Lupin’s share price has de-grown by ~0.6x over the past five years (from ~| 1474 in Feb 2017 to ~| 871 levels in Feb 2022).

We retain HOLD rating on the stock as high price erosion in the US is likely to persist in near to medium term while we await regulatory clearances and key high value complex launches in US to offset margin pressure

Target Price and Valuation: Valued Lupin at | 960 i.e. 24xFY24E EPS of | 40

Key triggers for future price performance:

Resolving regulatory challenges and speeding up approvals (guidance for seven launches from Goa plant while another 20 in pipeline), planned key high value launches from pipeline: Tiotropium, Suprep, bPegfilgrastim, etc

Lupin plans to strengthen the biosimilars portfolio across especially in EU and US apart from continued respiratory traction (gAlbuterol and Brovana) in US. Change in mix towards complex products to improve margin profile

Its tie-ups with Eli Lilly, Boehringer for anti-diabetics and with MSD for pneumonia vaccines will help bolster domestic franchise

Expansion in CNS, derma in domestic formulations along with progress on inorganic opportunities for growth and traction in diagnostic business

Alternate Stock Idea: Apart from Lupin, in our healthcare coverage we like Cipla

Cipla has a long-drawn strategy of targeting four verticals viz. One-India, South Africa & EMs, US generics & specialty and lung leadership

BUY with a target price of |

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