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Lupin (LUPN.BO)
Solid Year; Remains a Top Pick
Another solid year — Lupin stays steady on the growth path, with FY11 revenues &
adjusted net income up 20% & 27% respectively. All key markets clocked good growth
& margins have inched up despite a spike in R&D spend. We expect growth to remain
solid & some interesting product oppys in the US market to act as catalysts in 2HCY11.
The stock remains attractive at c17xFY11E EPS; maintain as a top sector pick.
Ends FY11 on a sound note — Revenue growth (+20%YoY) was strong across
markets: US (+23%, 5 launches), EU (+30%, new launches), India (+17%, 41 new
launches), Japan (+16%, 5 new launches, despite cut in generic prices) and other
emerging markets (+35%, esp. SA). EBITDA improved marginally (+22bps YoY)
despite sharp spike in R&D spend (9.5% of sales), staff cost & other overheads, as
RM/sales dipped 233bps on better mix. Recurring PAT growth (+27% YoY) was driven
by a lower tax rate (-454 bps, higher R&D benefits) & lower interest despite a higher
depreciation and lower other income. Lupin also booked R&D income from Salix (c1%
& 1% in top line & PAT respectively).
High growth phase lies ahead — as it scales up its offerings in the US (incl. niches
such as OCs, opthalmics & P-IV/FTFs), sustains steady growth in emerging markets &
improves profitability by back-ending manufacturing for Japan, SA to India. For FY12,
we see some interesting US launches (viz. Fortamet, Levofloxacin, Lotrel higher
strength, Geodon, 4-6 OC approvals) as key catalysts (mainly 2H). Lupin also intends
to get more aggressive on acquisitions, without compromising on returns.
Key analyst meet takeaways — a) No specific guidance: expects steady sales growth
& c50-75bps margin improvement; c18-20% growth in India sustainable; b) Biologics, a
key area of focus – to start with biosimilars & later get into bio-betters – 6 products
under development, 2 to enter clinic soon; c) To get more aggressive on acquisitions,
while maintaining stringent return criteria; d) No launch date on Allernaze yet – Suprax
tabs seeing good growth & Antara has seen a pickup in prescriptions QoQ.
Lupin
Company description
Lupin is a leading Indian pharma company actively targeting the generics
opportunity in regulated markets. Historically very strong in the anti-TB segment
(where it is the global leader), it has over the years built up expertise in
fermentation-based products and segments like cephalosporins, prils and statins.
Over the last few years, it has emerged as a fully integrated company, with
manufacturing capabilities in APIs and formulations and a direct marketing presence
in the target markets including the US, Europe and Japan (through the acquisition of
Kyowa).
Investment strategy
We rate Lupin Buy/Low Risk with a price target of Rs 500. Lupin fits well within our
prescription for growth in a troubled generics industry, given its differentiated
business & improving profitability. It has made good progress in its efforts to move
up the value chain in terms of product (from APIs to formulations) and markets (from
less regulated to regulated markets). With robust growth in recurring earnings (25%
CAGR over FY10-13E), healthy capital efficiency and attractive valuations, we rate
Lupin a Buy.
Valuation
Given that pharma is a growth sector, we use P/E as our primary method to value
the base business of pharma companies. Lupin has historically (last six to seven
years) traded in a band of 10-34x one-year forward earnings. We value Lupin at 20x
12m forward earnings, in line with the sector leaders such as Cipla, Dr Reddy’s &
Sun Pharma due to its leadership in key markets/products & robust financial
metrics. At 20x Mar12E recurring FDEPS, we arrive at a target price of Rs 500.
Risks
We rate Lupin Low Risk, inline with the recommendation of our quantitative riskrating
system, which tracks 260-day historical share price volatility. Key downside
risks to achieving our target price include: 1) Earlier than expected Generic
competition in Suprax (c8% of FY10 sales); 2) INR appreciation would hurt, given its
exposure to global markets; 3) Reasonable exposure to the domestic formulations
market (29% of sales) leaves Lupin vulnerable to any significant widening of the
price control net. 4) Inability to effectively scale up the Kyowa operations or Antara
sales.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Lupin (LUPN.BO)
Solid Year; Remains a Top Pick
Another solid year — Lupin stays steady on the growth path, with FY11 revenues &
adjusted net income up 20% & 27% respectively. All key markets clocked good growth
& margins have inched up despite a spike in R&D spend. We expect growth to remain
solid & some interesting product oppys in the US market to act as catalysts in 2HCY11.
The stock remains attractive at c17xFY11E EPS; maintain as a top sector pick.
Ends FY11 on a sound note — Revenue growth (+20%YoY) was strong across
markets: US (+23%, 5 launches), EU (+30%, new launches), India (+17%, 41 new
launches), Japan (+16%, 5 new launches, despite cut in generic prices) and other
emerging markets (+35%, esp. SA). EBITDA improved marginally (+22bps YoY)
despite sharp spike in R&D spend (9.5% of sales), staff cost & other overheads, as
RM/sales dipped 233bps on better mix. Recurring PAT growth (+27% YoY) was driven
by a lower tax rate (-454 bps, higher R&D benefits) & lower interest despite a higher
depreciation and lower other income. Lupin also booked R&D income from Salix (c1%
& 1% in top line & PAT respectively).
High growth phase lies ahead — as it scales up its offerings in the US (incl. niches
such as OCs, opthalmics & P-IV/FTFs), sustains steady growth in emerging markets &
improves profitability by back-ending manufacturing for Japan, SA to India. For FY12,
we see some interesting US launches (viz. Fortamet, Levofloxacin, Lotrel higher
strength, Geodon, 4-6 OC approvals) as key catalysts (mainly 2H). Lupin also intends
to get more aggressive on acquisitions, without compromising on returns.
Key analyst meet takeaways — a) No specific guidance: expects steady sales growth
& c50-75bps margin improvement; c18-20% growth in India sustainable; b) Biologics, a
key area of focus – to start with biosimilars & later get into bio-betters – 6 products
under development, 2 to enter clinic soon; c) To get more aggressive on acquisitions,
while maintaining stringent return criteria; d) No launch date on Allernaze yet – Suprax
tabs seeing good growth & Antara has seen a pickup in prescriptions QoQ.
Lupin
Company description
Lupin is a leading Indian pharma company actively targeting the generics
opportunity in regulated markets. Historically very strong in the anti-TB segment
(where it is the global leader), it has over the years built up expertise in
fermentation-based products and segments like cephalosporins, prils and statins.
Over the last few years, it has emerged as a fully integrated company, with
manufacturing capabilities in APIs and formulations and a direct marketing presence
in the target markets including the US, Europe and Japan (through the acquisition of
Kyowa).
Investment strategy
We rate Lupin Buy/Low Risk with a price target of Rs 500. Lupin fits well within our
prescription for growth in a troubled generics industry, given its differentiated
business & improving profitability. It has made good progress in its efforts to move
up the value chain in terms of product (from APIs to formulations) and markets (from
less regulated to regulated markets). With robust growth in recurring earnings (25%
CAGR over FY10-13E), healthy capital efficiency and attractive valuations, we rate
Lupin a Buy.
Valuation
Given that pharma is a growth sector, we use P/E as our primary method to value
the base business of pharma companies. Lupin has historically (last six to seven
years) traded in a band of 10-34x one-year forward earnings. We value Lupin at 20x
12m forward earnings, in line with the sector leaders such as Cipla, Dr Reddy’s &
Sun Pharma due to its leadership in key markets/products & robust financial
metrics. At 20x Mar12E recurring FDEPS, we arrive at a target price of Rs 500.
Risks
We rate Lupin Low Risk, inline with the recommendation of our quantitative riskrating
system, which tracks 260-day historical share price volatility. Key downside
risks to achieving our target price include: 1) Earlier than expected Generic
competition in Suprax (c8% of FY10 sales); 2) INR appreciation would hurt, given its
exposure to global markets; 3) Reasonable exposure to the domestic formulations
market (29% of sales) leaves Lupin vulnerable to any significant widening of the
price control net. 4) Inability to effectively scale up the Kyowa operations or Antara
sales.
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