Lupin - near- term challenges; long-term growth intact; visit note; Buy: Edelweiss

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Lupin (LPC IN, INR 415, Buy)

We recently met the Lupin (LPC) management. Key takeaways of our interaction are:

n  Domestic formulations to remain strong over medium term

LPC expects strong growth (20% CAGR) in domestic business over FY12-13E, in line with our expectations, led by focus on brand building (Top 10 brands contribute only 19% to total domestic sales) and introduction of new products. The company has well spread-out coverage in metros and tier-I cities and plans to expand it in tier-II/III cities with higher field force (to add 200 by end FY11E).

n  Japan critical driver for growth and margin expansion in medium term

Management expects the company’s niche presence in Japan to impart higher growth to its business over the medium term as LPC estimates revenue growth of 15-16% driven by 8-10 products launches in FY12. We believe Japan’s contribution to margins will be far higher, as the company expects to source more products from India. For instance, of the 8-10 product launches, four-five will be sourced from India. LPC expects margins in Japan business to expand 600bps to 24-25% over the next two-three years. Moreover, management clarified that recent earthquakes in Japan will not have a substantial impact on supplies; however, it would rather pent-up short-term demand.

n  Near-term outlook on US remains challenging

LPC expects growth in US (35% of total sales) to be negatively impacted in the near term from higher base of Lotrel and Suprax and slower ramp-up in Antara. We note that US generics business grew 42% YTD despite lower rate of approvals, largely driven by higher sales from Lotrel (USD 15-17 mn per quarter since launch) which is expected to decline due to significant price erosion post launch from other players (now 5-6 player market). Further, niche launches in the key OC portfolio (3-4 expected in FY12E) will be rather back ended (Q4 FY12E) due to delay in approvals at the FDA end. We expect US generics to grow at a slower rate in FY12E due to higher base effect, however, incremental sales from OC launches and FTF pipeline will drive strong growth in FY13.

n  Outlook and valuations: Strong execution play; maintain ‘BUY’

We believe LPC’s strong execution and large pending US pipeline (65-70 ANDA approvals expected in next 2-3 years) with differentiated products impart growth visibility over FY13-14E. However, there could be some pressure in earnings in short term. Hence, we reduce our earnings estimates by 6-2% in FY12-13E. We maintain ‘BUY’ rating.