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US measures weigh on Q1; turnaround stretched

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 (market leader: 44 products; Top 3: 113 products) along with being sixth largest company in the Indian pharmaceutical market

*The company was recently going through a rough patch especially on the US generics front due to plant compliance issues besides margins pressure

Q1FY23 Results: Lupin’s revenues from US plummeted due to price erosion, shelf stock adjustments and inventory write-downs.

* Sales were down 12% YoY to | 3744 crore

* EBITDA was at | 164 crore, down 82% YoY with margins at 4.4%

* Adjusted loss of | 89 crore vs. profit of | 542 crore in Q1FY22

What should investors do: Lupin’s share price de-grew 0.86x in past three years

* Downgraded the stock from HOLD to REDUCE rating due to 1) uncertainty and weak visibility on key high value launches, along with likely overreliance on gSpiriva US launch in Q4FY23, 2) pending regulatory clearances and 3) delay in margin recovery

Target Price and Valuation: Valued Lupin at | 610 i.e. 22x FY24E EPS of | 27.7

Key triggers for future price performance:

* Resolving regulatory challenges and speeding up approvals and planned key launches (FY23: Suprep and Spiriva) from pipeline earmarked for US

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

* R&D investment earmarked now to evolve generic portfolio focused towards complex generics in Injectable, Inhalation along with biosimilars

* Doubling down on India and ex-US geographies. Exploring both organic and inorganic opportunities in different therapies for domestic formulations

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 | 1135

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