Lupin – 2QFY2011 Result Update: Angel Broking

Visit http://indiaer.blogspot.com/ for complete details �� ��

  Lupin – 2QFY2011 Result Update

Angel Broking maintains a Neutral  on Lupin.

Lupin reported strong 2QFY2011 results driven by the US generic (Lotrel and

increase in market share of existing products) and Japan business. However, the

launch of Allernaze quite unlikely in the foreseeable future is marginally

disappointing. The company expects to register 25-30% growth in top-line and

75-100bp yoy expansion in EBITDA margin going forward. We maintain Neutral

on the stock.

Strong results: For 2QFY2011, Lupin reported net sales of `1,405cr (`1,115cr),

which was higher than our estimates driven by the US generic and Japan

business. Sales in the advanced markets grew by a stellar 39.7% yoy to `673cr

(`482cr). The company reported OPM of 19.2% (14.7%), up by 446bp yoy on

the back of favourable product mix. Gross margins came in at 60.9% (55.0%)

due to strong growth in the US business (favourable product mix- Suprax, Antara

and traction in US generic business). Lupin reported net profit of `214cr

(`161cr), up 33.6% driven by top-line growth and OPM expansion.

Outlook and Valuation: We expect net sales and earnings to post CAGR of

17.8% and 23.2% to `6,579cr and `23.3 respectively, over FY2010-12. The

stock is currently trading at 24.0x and 19.3x FY2011E and FY2012E earnings,

respectively. We maintain Neutral on the stock.

Concall takeaways

􀂄 In the US, the company was unable to launch Allernaze in October 2010 due

to certain manufacturing issues and currently the time frame of the launch

hangs fire. On the other hand, Lupin received approval for the chewable

tablet form of Suprax and has made applications for the drops, which is likely

to boost its sales further. On the generic front, the company expects the first

batch (4-5 products) of OC products to be launched by 3QFY2012.

􀂄 In Japan, post launch of one new product in May 2010, the company now

plans to launch additional four new products in November 2010.

􀂄 The company expects 25-30% top-line growth and EBITDA margin expansion

by 75-100 bp yoy going forward. Lupin plans to incur capex of `400-500cr

each year over the next three years. The tax rate for FY2011 is expected to be

in the range of 12-15%.

􀂄 Lupin continues to scout for acquisitions (areas: US branded space, access to

Latam market or to strengthen R&D pipeline).

Recommendation Rationale

􀂄 US market the key driver: The high-margin branded generic business has

been the key differentiator for Lupin in the Indian pharma space. The

company has further cemented its position in the segment by acquiring rights

for Antara. With this, Lupin clocked sales of US $127mn in FY2010, up 72%

yoy and higher OPM. The company currently has a sales force of 160

personnel in the US. On the generic turf, Lupin is currently the fifth largest

player in the US in terms of prescriptions and 26 out of its 28 products figuring

among the top-3 in terms of market share. In the OC segment, Lupin has filed

22 ANDAs and expects approvals to commence from 2HFY2012. As per

management, OC could contribute US $100mn to top-line over the next twothree

years. As on 1HFY2011, cumulative filings stood at 132, of which 45

have been approved. Lupin plans to launch 6 products in the US in FY2011,

and another 80 products over the next three years. Lupin now has 34 Para

IV’s, of which 11 are FTFs (the company is the exclusive holder in three of

them: Glumetza, Fortamet and Cipro DS) addressing a market size of

US $8bn.

􀂄 Domestic formulations on strong footing: Lupin continues to make strides in

the Indian market. Currently, it ranks No.5 climbing up from being No.11 six

years ago. Lupin has been the fastest growing company among the top-5

players in the domestic formulation space, registering strong CAGR of 20.0%

over the last three years. Six of its products figure among the top-300 brands

in the country. Lupin introduced 42 new products in the Indian market in

FY2010 and has a strong field force of 3,700 MRs.

􀂄 First mover advantage in Japan: With Kyowa’s acquisition in FY2008, Lupin

figures among the few Indian companies with a formidable presence in the

world’s second largest pharma market, Japan. The Japanese government has

introduced a new policy and regulatory reforms to increase the generic drugs’

contribution from a relatively low 17% in CY2007 to 30% of prescriptions by

CY2012. This is estimated to open up a US $10bn opportunity for the global

generic players. We expect Lupin to post a CAGR of 20% over FY2009-12 in

the Japanese market and the region is likely to contribute 12% of its FY2012

total sales.

Outlook and Valuation

Though the unlikely launch of Allernaze in the near future is disappointing, our

estimates are unlikely to be impacted, as shortfall in contribution from

branded generic segment would be offset by the strong growth in US generic

segment. We expect net sales and earnings to log CAGR of 17.8% and 23.2%

to `6,579cr and `23.3 over FY2010-12, respectively. The stock is currently

trading at 24.0x and 19.3x FY2011E and FY2012E earnings, respectively. We

maintain Neutral on the stock.