Citi on Lupin -- A Leading Play on Global Generics

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A Leading Play on Global Generics
 Business Snapshot – Lupin is an innovation-led pharma company, producing
a wide range of generic & branded formulations and APIs for the developed
and developing markets. Its products reach over 70 countries in the world.
The company has emerged as one of the leading Indian players in the US
(ranked 5th by prescriptions & growing at 50 %) & Japan (ranked 7th and
growing at 23%) and is among the fastest growing companies in India.


 Latest Quarterly Performance – 2Q results were strong, as all key markets &
businesses witnessed good traction. India grew 18%, while Japan recovered
from the blip in 1Q to grow 22%. US & EU formulations grew 46% (branded
biz: +24% adj; generics biz: +53%) on the back of Lotrel & good traction in
older products. EBIDTA margins improved 238bps YoY, on better sales mix
(Lotrel, Suprax & Antara in US, higher share of formulations), despite ramp
up in US branded field force. Net profit grew 34% YoY.

 Key Catalysts / Issues – a) US branded biz: Efforts to expand pipeline, scale
up in Antara, line extensions in Suprax & potential launch of Allernaze; b)
US generics biz: Lotrel market share & pricing trends, new product
introductions & newsflows related to more limited competition products; c)
Timelines for approvals and launches of oral contraceptives in the US
market; d) Inorganic initiatives in emerging markets (especially Latin
America); e) Japan – margin expansion in Kyowa & initiatives by the
Japanese govt to increase generic penetration

 Allernaze Launch Delay is a Temporary Setback – The launch of Allernaze in
the US (originally scheduled for Nov’10) has been pushed out – unlikely in
the foreseeable future. While it has got the required manufacturing
equipment, it still has some issues to sort out before a launch is possible.
The delayed launch of Allernaze in the US market is a temporary setback for
the US branded biz but not very material at this point as we have built in
cUS$15m of sales from Allernaze in FY12 (c1% of overall sales).

 Valuations: Premium is Deserved – Lupin has re-rated materially over the last
3-4 years & in our view deservedly trades in line with frontline pharma
stocks at c20xFY12E EPS. It stands out among its peers, given its leadership
in attractive markets, differentiated products & robust financial metrics. It is
the largest Indian firm in the US (in terms of its branded biz, prescriptions &
sales / product) & Japan, among the top 10 & fastest growing firms in India
& has a leading presence in areas such as anti-TB, cephalosporins & prils.
Its RoCE (c30%) is also among the highest in the sector & compares
favorably with the sector average (c18%).