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Margin slips; pipeline execution key

Lupin (LPC) beat revenue estimate by 2%, whereas EBITDA missed by 8%. Adjusted EBITDA margin slipped to 14.6% as famotidine erosion, higher AG and in-licensed contribution impacted gross margin.

While Lupin has a healthy pipeline comprising gSpiriva, pegfilgrastim, Suprep Bowel kit, potentially gRevlimid and Fostair ramp-up, among others, success in effect hinges on execution. The specialty and R&D restructuring is encouraging, but US launches are critical for gross margin expansion. We are reducing FY23 EPS by ~10% due to delayed launches and margin pressure in the near term. Our revised target price is INR990 (down from INR1060) based on 24x FY23E core EPS and INR72 from specialty and gRevlimid NPV. Maintain ‘HOLD’.

Margin plummets; specialty restructuring encouraging

Margin improvements seen in H2FY21 have fizzled out. Despite India contribution being 39%, highest in several years, gross margin slipped to 60.2% impacted by famotidine erosion and higher AG contribution. EBITDA margin bore the brunt of lower gross margin and slipped to 14.6% (after adjusting for one-time specialty expenses). Management expects USD15mn annualised savings starting Q3FY22. The company had indicated the change in capital allocation wherein spends in the US will be moderated and deployed in the India business. While encouraging, margin expansion hinges on successful execution of its pipeline and cost levers playing out.

Promising pipeline; execution remains key

LPC’s pipeline remains strong, comprising FTF-like Suprep bowel kit, high-value launches such as gRevlimid, niche ones such as gSpiriva, gDulera, and biosimilars, besides expansion of bEnbrel and gFostair in the EU. The company has seen a sharp uptick in albuterol share, which it believes will reflect from Q3. That said, its nearterm revenues are likely to be impacted from famotidine erosion and potentially levo competition. While the pipeline is impressive, delayed approval may impact revenue and margins, not to mention biosimilars have proved to be a tough market for incumbents. Hence we await an uptick in the core business before turning positive.

Outlook and valuation: Near-term uncertainties; maintain ‘HOLD’

We are reducing FY23E EPS by 10% due to near-term US uncertainties. While Lupin trades at 21x FY23 EPS, some of the opportunities are not sustainable (Suprep bowel, gRevlimid). We assign 24x to FY23E core EPS and INR72/share NPV-derived value for specialty/ gRevlimid, yielding a target price of INR990. Retain ‘HOLD/SN’.

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