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Lupin (LUPN.BO)
Alert: Adding Muscle in Japan
We expect Lupin’s acquisition of I’rom Pharma to strengthen its presence in Japan by
providing exposure to injectables & the growing DPC hospitals segment. While
financial details are sketchy, the management has indicated that the deal would be
earnings accretive from the outset. Lupin remains one of our top picks in the sector.
The deal – Lupin’s Japanese subsidiary (Kyowa) entered into an agreement with I’rom
Holdings of Japan to acquire up to 100% stake in the latter’s subsidiary I’rom
Pharmaceuticals. This is Lupin’s second acquisition in the Japanese market.
About I’rom Pharmaceuticals – I’rom Pharma is a specialty injectables company in
Japan, established in 1947 and has its headquarters in Tokyo. It primarily caters to the
Diagnosis Procedure Combination (DPC) hospitals in Japan. DPC hospitals are fixed
rate/flat sum reimbursement hospitals and hence more likely to promote generics.
These account for over 35% of overall hospital beds in the country. It had revenues of
JPY5,361m (cUS$69m) in FY11 (year to March), with single-digit margins.
Consolidating its presence in Japan – With this acquisition, Lupin further
strengthens its presence in the high potential Japanese market. The combined entity
(Kyowa + I’rom) would have revenues of cUS$230-240m in Japan – c15% of Lupin’s
overall turnover. I’rom’s injectables portfolio is complementary to Kyowa’s oral portfolio.
Besides, Lupin can now seek to leverage I’rom’s strong position in Japan’s hospitals to
introduce injectables from its own product basket in this market. Lupin remains the only
Indian play, with any degree of scale, on the Japanese generics opportunity.
What is the financial impact? – Very few financial details are available, making it
difficult for us to independently ascertain the financial impact at this stage. The
management has indicated that the transaction would be accretive to earnings from the
outset. We understand that margins are well below Lupin’s corporate average (would
improve going forward) but this is offset by the valuation (undisclosed) and low cost of
funds (possible low cost debt raised in Japan). Lupin’s track record on inorganic
initiatives also gives us comfort on this front.
Lupin
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 and Dr Reddy’s, due to
its leadership in key markets/products & robust financial metrics. At 20x Dec12E
recurring FDEPS, we arrive at a target price of Rs565.
Risks
Key risks to our target price include: 1) Earlier than expected generic competition in
Suprax; 2) INR appreciation would hurt, given its exposure to global markets; 3)
Reasonable exposure to the domestic formulations market (c31% of sales) leaves
Lupin vulnerable to any significant widening of the price control net or slow down in
industry growth. 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)
Alert: Adding Muscle in Japan
We expect Lupin’s acquisition of I’rom Pharma to strengthen its presence in Japan by
providing exposure to injectables & the growing DPC hospitals segment. While
financial details are sketchy, the management has indicated that the deal would be
earnings accretive from the outset. Lupin remains one of our top picks in the sector.
The deal – Lupin’s Japanese subsidiary (Kyowa) entered into an agreement with I’rom
Holdings of Japan to acquire up to 100% stake in the latter’s subsidiary I’rom
Pharmaceuticals. This is Lupin’s second acquisition in the Japanese market.
About I’rom Pharmaceuticals – I’rom Pharma is a specialty injectables company in
Japan, established in 1947 and has its headquarters in Tokyo. It primarily caters to the
Diagnosis Procedure Combination (DPC) hospitals in Japan. DPC hospitals are fixed
rate/flat sum reimbursement hospitals and hence more likely to promote generics.
These account for over 35% of overall hospital beds in the country. It had revenues of
JPY5,361m (cUS$69m) in FY11 (year to March), with single-digit margins.
Consolidating its presence in Japan – With this acquisition, Lupin further
strengthens its presence in the high potential Japanese market. The combined entity
(Kyowa + I’rom) would have revenues of cUS$230-240m in Japan – c15% of Lupin’s
overall turnover. I’rom’s injectables portfolio is complementary to Kyowa’s oral portfolio.
Besides, Lupin can now seek to leverage I’rom’s strong position in Japan’s hospitals to
introduce injectables from its own product basket in this market. Lupin remains the only
Indian play, with any degree of scale, on the Japanese generics opportunity.
What is the financial impact? – Very few financial details are available, making it
difficult for us to independently ascertain the financial impact at this stage. The
management has indicated that the transaction would be accretive to earnings from the
outset. We understand that margins are well below Lupin’s corporate average (would
improve going forward) but this is offset by the valuation (undisclosed) and low cost of
funds (possible low cost debt raised in Japan). Lupin’s track record on inorganic
initiatives also gives us comfort on this front.
Lupin
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 and Dr Reddy’s, due to
its leadership in key markets/products & robust financial metrics. At 20x Dec12E
recurring FDEPS, we arrive at a target price of Rs565.
Risks
Key risks to our target price include: 1) Earlier than expected generic competition in
Suprax; 2) INR appreciation would hurt, given its exposure to global markets; 3)
Reasonable exposure to the domestic formulations market (c31% of sales) leaves
Lupin vulnerable to any significant widening of the price control net or slow down in
industry growth. 4) Inability to effectively scale up the Kyowa operations or Antara
sales
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