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India Equity Research Reports, IPO and Stock News
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Limited room for slips
CHANGE
Re-rating done, all eyes on execution
Lupin saw a sharp P/E expansion over the last two years driven by large
filings in the US – niche products like oral contraceptives (OC’s) - and
potential ramp up of the US branded generic business. With the latter
showing signs of moderation, all eyes will be on execution in OC’s. Other
geographies like India and Japan continue to remain strong.
CATALYST
FY13/14 EPS is 10% lower than street on slower OC ramp up
We believe market dynamics for OC’s may have become more competitive,
while delays in product approvals for over a year may have reduced
competitive advantages for Lupin. We assume a slower ramp up in OC’s
with sales of USD100m in FY14, which is 20-50% lower than company
indications. Our FY13/14 EPS estimate is 12% lower than consensus.
VALUATION
September 2012 base case price target of INR449
We value Lupin’s base earnings at 17.5x one year forward earnings, or
INR444 and its Para IV pipeline at INR5. Upside risks are greater than
expected ramp up in OC’s which gives a bull case value of INR509;
downside risks are delay in key launches in the US and lower than
expected market share in OC’s which gives a bear case value of INR417.
COMMENT
Key highlights of the report
§ Lupin’s execution history in the US
§ Market dynamics of oral contraceptives which include key brands,
Sandoz launches until date and study of Lupin’s competitive
advantage
§ Lupin’s US branded generic overview
§ Para IV opportunities in US
§ India sales trend and new launches
§ Japan sales trend and contribution
§ Acquisition history of Lupin
§ Base case, bull case, bear case scenarios
Key risks
Upside risks
Greater than estimated market share in oral contraceptives will hold upside potential to our estimates
We have built in 4 OC launches in FY12and the full basket to be introduced over a period of 18-24 months.
We have built in sales of USD50m in FY13 and USD100m in FY14 based on 10% market share by the end of
FY14. Greater than 10% market share would bring upside potential to our estimates. Assuming Lupin
generates market share of 10%/15% in FY13/FY14, our earnings estimates for FY13/FY14 would increase by
5.1%/3.7% respectively.
Corporate development like divestment of domestic formulations business
Media reports over the last three months indicate that Lupin is looking at divesting its domestic
formulations business. While the company has denied any such talks, any corporate development could
have an upside risk to our HOLD call.
Downside risks
Greater than estimated loss due to generic competition in Suprax
Suprax is Lupin’s key product in the US branded generic space given that the Antara ramp up is not
happening, AeroChamber Plus is a small product and AllerNaze launch is unlikely in the near term. Suprax
is currently protected from generic competition by a citizen petition. We assume generic competition to
come in 12 months from now and factor in a 10% decline in Suprax sales for FY14. Greater than estimated
loss due to generic competition can impact Lupin’s US branded business portfolio significantly.
Delay in key product launches in the US
The company made over 60 filings over FY09-10 of which a large number were directed towards niche
generics like oral contraceptives. Lupin plans to launch 5-6 products in 2HFY12 (of which four would be OC)
and over 25 products in FY13 (~15 OC products). We budget 10-12 new launches outside niche launches in
the US as approvals start coming through. We expect FY12 to be a modest year of growth as new launches
are expected to kick in from early FY13. This should aid a revenue CAGR of 16% over FY11-14
Valuations
Sharp re-rating for the stock over the last two years, execution holds the key to retain current valuations
Lupin has been amongst the most successful Indian pharma companies to have transitioned its business
model from low margin Anti TB products in India and global API supplies, to relatively high margin chronic
therapy products, featuring amongst the top 10 generic companies in US with a presence in the most
promising generic market-Japan. Known as an anti TB company in 2005 (India accounted for 40% of sales of
which anti TB was ~33%, API contributed ~50%), Lupin in FY11 looks completely different. (India contributes
28% of which chronic care is 45%, anti TB is down to 10%, US: 35%, Japan: 11%). This is reflected in Lupin’s
earnings growth of 36% over FY06-11 (excluding the acquisitions of Antara and Kyowa, we estimate Lupin to
have witnessed an earnings CAGR of 30% over the same period).
Initiate coverage with a HOLD, base case price target of INR449
We initiate coverage with a HOLD and our base case price target for Lupin is INR449 (17.5x one year
forward earnings). Our bull case value of INR509 (19x 12-month forward earnings) is assuming 10% market
share in FY13 and 15% in FY14 along with price erosion of 50% for OC’s. Our bear case value of INR417
(16.5x one year forward) assumes 4% market share in FY13 and 8% in FY14 along with greater price erosion
of 80% in OC’s.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Limited room for slips
CHANGE
Re-rating done, all eyes on execution
Lupin saw a sharp P/E expansion over the last two years driven by large
filings in the US – niche products like oral contraceptives (OC’s) - and
potential ramp up of the US branded generic business. With the latter
showing signs of moderation, all eyes will be on execution in OC’s. Other
geographies like India and Japan continue to remain strong.
CATALYST
FY13/14 EPS is 10% lower than street on slower OC ramp up
We believe market dynamics for OC’s may have become more competitive,
while delays in product approvals for over a year may have reduced
competitive advantages for Lupin. We assume a slower ramp up in OC’s
with sales of USD100m in FY14, which is 20-50% lower than company
indications. Our FY13/14 EPS estimate is 12% lower than consensus.
VALUATION
September 2012 base case price target of INR449
We value Lupin’s base earnings at 17.5x one year forward earnings, or
INR444 and its Para IV pipeline at INR5. Upside risks are greater than
expected ramp up in OC’s which gives a bull case value of INR509;
downside risks are delay in key launches in the US and lower than
expected market share in OC’s which gives a bear case value of INR417.
COMMENT
Key highlights of the report
§ Lupin’s execution history in the US
§ Market dynamics of oral contraceptives which include key brands,
Sandoz launches until date and study of Lupin’s competitive
advantage
§ Lupin’s US branded generic overview
§ Para IV opportunities in US
§ India sales trend and new launches
§ Japan sales trend and contribution
§ Acquisition history of Lupin
§ Base case, bull case, bear case scenarios
Key risks
Upside risks
Greater than estimated market share in oral contraceptives will hold upside potential to our estimates
We have built in 4 OC launches in FY12and the full basket to be introduced over a period of 18-24 months.
We have built in sales of USD50m in FY13 and USD100m in FY14 based on 10% market share by the end of
FY14. Greater than 10% market share would bring upside potential to our estimates. Assuming Lupin
generates market share of 10%/15% in FY13/FY14, our earnings estimates for FY13/FY14 would increase by
5.1%/3.7% respectively.
Corporate development like divestment of domestic formulations business
Media reports over the last three months indicate that Lupin is looking at divesting its domestic
formulations business. While the company has denied any such talks, any corporate development could
have an upside risk to our HOLD call.
Downside risks
Greater than estimated loss due to generic competition in Suprax
Suprax is Lupin’s key product in the US branded generic space given that the Antara ramp up is not
happening, AeroChamber Plus is a small product and AllerNaze launch is unlikely in the near term. Suprax
is currently protected from generic competition by a citizen petition. We assume generic competition to
come in 12 months from now and factor in a 10% decline in Suprax sales for FY14. Greater than estimated
loss due to generic competition can impact Lupin’s US branded business portfolio significantly.
Delay in key product launches in the US
The company made over 60 filings over FY09-10 of which a large number were directed towards niche
generics like oral contraceptives. Lupin plans to launch 5-6 products in 2HFY12 (of which four would be OC)
and over 25 products in FY13 (~15 OC products). We budget 10-12 new launches outside niche launches in
the US as approvals start coming through. We expect FY12 to be a modest year of growth as new launches
are expected to kick in from early FY13. This should aid a revenue CAGR of 16% over FY11-14
Valuations
Sharp re-rating for the stock over the last two years, execution holds the key to retain current valuations
Lupin has been amongst the most successful Indian pharma companies to have transitioned its business
model from low margin Anti TB products in India and global API supplies, to relatively high margin chronic
therapy products, featuring amongst the top 10 generic companies in US with a presence in the most
promising generic market-Japan. Known as an anti TB company in 2005 (India accounted for 40% of sales of
which anti TB was ~33%, API contributed ~50%), Lupin in FY11 looks completely different. (India contributes
28% of which chronic care is 45%, anti TB is down to 10%, US: 35%, Japan: 11%). This is reflected in Lupin’s
earnings growth of 36% over FY06-11 (excluding the acquisitions of Antara and Kyowa, we estimate Lupin to
have witnessed an earnings CAGR of 30% over the same period).
Initiate coverage with a HOLD, base case price target of INR449
We initiate coverage with a HOLD and our base case price target for Lupin is INR449 (17.5x one year
forward earnings). Our bull case value of INR509 (19x 12-month forward earnings) is assuming 10% market
share in FY13 and 15% in FY14 along with price erosion of 50% for OC’s. Our bear case value of INR417
(16.5x one year forward) assumes 4% market share in FY13 and 8% in FY14 along with greater price erosion
of 80% in OC’s.
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