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Lupin Pharma |
Robust earnings; Revise target price upwards |
ACCUMULATE
CMP: Rs469 Target Price: Rs496
n Strong operating performance largely driven by robust growth momentum in US, Europe, Japan and India coupled with favorable product mix
n US branded business grew at 24% (adjusted for one time impact of change in accounting treatment for rebates) and India formulations at 22% (adjusted for inventory correction)
n Both existing and new prescriptions seeing growth in Antara; OC launches in US in Q312 will aid long term revenue visibility
n On account of improved performance, revise earning estimates and raise target to Rs496; Maintain Accumulate, owing to limited upside
Advanced markets and domestic formulation business aided 23% growth
43% growth in US, 100% in Europe and 16% in domestic formulations (22% adjusted to
inventory correction) resulted in 23% (estd. 20%) growth in revenues to Rs14.3bn. In
the US, 53% growth in the generic segment was largely driven by higher revenues from
Lotrel (~c US$17mn) and improved contribution of existing products. Generic Lotrel
continues to be a lucurative market with six generic players now. Today Lupin enjoys
no. 1 position in 14 out of 28 products it has launched so far. In the US branded space,
ramp-up in Antara is slow than anticipated, however sales have picked up in last 2
months, led by strong promotion and increased marketing efforts (field force in the US is
now 160). Infact both existing as well as new prescriptions are now seeing growth unlike
last quarter when Lupin was loosing existing prescriptions. Moreover, with Suprax
tablets approved and the drop formulations filed through 505 (b) (2), medium term
prospects of branded franchises in the US remain robust.
European formulations were led by 100% growth in France business which we attribute
to Mandideep plant being operational. Growth in US would be triggered by ramp up in
Antara, AllerNaze launch and launch of 8-10 ANDAs per year. Company expects 4-5
products from its OC portfolio to hit the US market by Q3FY12E and 12-15 products by
Q3FY13E (expect peak revenue potential of over US$150mn).
Domestic formulations grew at a slower rate due to one-time inventory
adjustment
Domestic formulations grew at a slower than industry rate due to one time inventory
correction in the acute segment. Adjusting to this, sales grew in excess of 20% (chronic
segment contributes ~70% and TB portfolio contributes ~17% of revenue in the
domestic market).
Japan market grows 22%, in spite of price cut initiative by government
In the Japanese market, in spite of price-cut initiative taken by the government earlier,
22% growth (17% in JPY) was due to higher volume off-take; 4 new launches in
Q3FY11 will lead to 14-15% CAGR over FY10-13E (driven by favorable macro
environment).
Favorable product mix resulted in 237bps expansion in operating margins
On the operating front, the company witnessed 39% increase in EBIDTA (margin expansion
of 237 bps to 20.8%). The expansion on the margin front was mainly because of favorable
product mix (contribution of formulation business has increased from 83% in Q2FY10 to
86% in Q2FY11) and contribution of limited competition product “Lotrel”, where the
realizations are higher. This led to improvement in gross margins by a robust 470bps to
61.7%. However 131 bps increase in employee cost (led by increase in sales force for US
branded business earlier) and 101bps increase in other expenditures restricted further
expansion in EBIDTA margins. The R&D expense for the quarter has gone up from 7.9% of
the sales in Q1FY11 to 8.5% in Q2FY11. We expect the R&D cost to remain high (8% of
sales) due to increase in ANDA filings in niche therapies. Going forward, management has
guided 75-80 bps expansion in operating margins annually.
Strong operating performance aided 34% growth in APAT
Strong revenue growth coupled with robust operating performance resulted in 34% growth
in APAT to Rs2.15bn (est. of Rs1.98bn). This is despite the fact that other income has
come down by 53% and depreciation cost has gone up by 79% (due to amortization of
Antara brand) during the quarter. The EPS for the quarter and H1FY11 stood at Rs4.8 and
Rs9.3 against FY11E EPS of Rs19.6. Net debt of the company is Rs9.5bn, with debt-toequity
of 0.32 (down from 0.35 in Q1FY11 and 0.37 in Q2FY10). Company has guided for a
capex of Rs4-5bn for FY11E. Management has also guided tax provision of 13-13.5% vs
our earlier assumption of 17%.
Key highlights of con-call
n Antara sales have picked up in the last 2 months. Existing prescriptions, after witnessing
a downward trend are now stabilizing; new prescription trend is up
n AllerNaze launch expected in Sep’10 got delayed due to problems regarding equipment
validation
n Suprax chewable tablets have been approved by USFDA; to be launched soon.
Company has filed for 2 line extensions (drop formulations) of Suprax with 505 b (2)
application
n Plans to enter one niche therapy area every year over the next 3-5 years with OC (23
ANDA filed so far; first launch in FY12E); ophthalmology (fillings in FY11E), dermatology
(fillings in FY12E), respiratory and hormones (FY13E) coupled with bio-similars (fillings
start post FY12E).
n Expects 4-5 products from its OC portfolio to hit the US market by Q3FY12E; another
12-15 products by Q3FY13E. Total addressable market is US$4.5bn with limited
competition (expect 5-6 players in this segment).
n The company has a strong product pipeline of 132 ANDAs and 15 FTFs (all are Para IV;
total 54 Para IV filings). Company expects 70 ANDA approvals during the next 2 years
n Lunched 12 products in India this quarter; 22 in H1FY11
n 4 new launches to hit the Japan market in Q3FY11. Goa facility approved by Japanese
authority
n Done capex of Rs920mn this quarter; guided for Rs4-5bn of capex annually for the next
3 years
n Lupin is hopeful of maintaining 25% top-line growth with EBITDA margin expansion of
75-100bps annually.
Results above estimates; re-rate in line with larger peers; Maintain
Accumulate
On the back of improved performance, higher than expected contribution of Lotrel and lower
tax guidance, we revise our earning estimates marginally by 4% each to Rs19.6 and Rs23.7
for FY11E/FY12E respectively. While its recent out performance (15% relative returns in
last three months) has narrowed down the gap between Lupin and its comparable peers to
a great extent, Lupin’s out performance across segments along with its well charted growth
strategy makes it our best bet in the Indian Pharma space. We are of the view that though
re-rating story in the stock is largely played out, from here onwards return would be in-line
with earnings growth. We believe Lupin should be a part of the core portfolio because of a)
strong execution track record, b) fair visibility on the earnings, c) strong pipeline coupled
with both Para IV (15 FTFs) as well as niche therapies and d) well diversified presence
across the key markets. Owing to robust earnings growth (24% over FY10-12E), strong
RoEs (excess of 30%) and strong franchise in US and India, we value the company in-line
with larger pharma peers at 20x FY12E. The fair value of base business works out to be
Rs474 (20x FY12E EPS of Rs23.7). We value its Para-IV pipeline at Rs22/share, which
results in our SoTP-based target price of Rs496 (earlier Rs422). Owing to limited upside,
we maintain our Accumulate rating. At CMP of Rs469, the stock is trading at 24x FY11E
and 20x FY12E.
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