Lupin Ltd: complex generics and specialty to drive US revenues

Dated: 29th August 2019
Market update:
With no big catalyst today, the markets continued to fall for third straight day as Nifty dropped -0.9% to 10,948. Today was also the monthly F&O (Futures and Options) expiry day which led to volatile trading session. It is important to note that the FIIs have continued to sell their positions in spite of rollback of additional surcharge. This highlights that the focus is on the economy and corporate earnings growth.

Among the sectoral indices, Pharma was an outlier with the index rising 2.3%. 7 out of 11 major indices were in the red zone with Financial services (-1.9%) and Banks (-1.8%) led the drop. Within the stocks, Sun pharma (+5.2%) bharti infratel (+3.5%), JSW steel (+3.0%) were the best performers while SBI (-3.7%), Yes bank (-3.5%) and HDFC (-2.68%) were the worst performers.

Lupin Ltd: complex generics and specialty to drive US revenues

Following are the excerpts from the interview given by Mr Nilesh Gupta, Managing Director of Lupin, published in Livemint.

• The industry is going through a major transformation at this point of time. He mentioned that the industry had 10 years of strong growth where the Indian generics markets were doing well.
• In the last 2-3 years, the generics industry is under pressure in the US. He attributed two reasons for this slowdown. First, in the beginning, the industry used to have at least 10 customers controlling about 90% of the market. In the current markets, only three customers control the 90% of the market. This shift happened 2 years ago. The second reason is hyper competition among the players for market share which led to pricing pressure.
• Lupin was a late entrant in the generics market. The other companies were already present in the generics market 15 year ago. In spite of that, the company was able to execute the story well for 10 years. In the last 2-3 years, things have started to go down.
• On the generics front, currently the company is facing single digit price erosion. During the times when the consolidation of customers took place, the price erosion was in the range of 12-15%. He mentioned that price increases were very permissible in the past. In the present market, nobody would take any rational price increase.
• Gupta was bullish about Indian market. Lupin is number five in the Indian market. The market is growing in the range of 8-10%, which is above most of the markets. The company has more market share in US than in India. He was of the opinion that as the affordability of India increases, with that increases the ability to get diagnosed and then get treated as well. This will be a great long term opportunity for Indian market.
• About the lawsuit against Indian pharma companies including Lupin in US, the company has done internal investigation. He is confident about the company’s position and merits of the case.
• Biosimilars is a great opportunity for the company. Lupin is expanding heavily in this segment. The company has six products in the pipeline. Three of them are more later stage and the remaining three are in the early stage of development.
• According to Gupta, the big growth drivers for the companies, especially in the US, are going to be from complex generics and specialty in the next five years.

Consensus Estimate (Source: marketscreener website)

• The closing price of Lupin was Rs 734/- as of 29^th August 2019. It traded at a price to Earnings Multiple (P/E) multiple of 19x/16x the consensus EPS estimates for FY20/21E of Rs 38.2/45.8 respectively.
• Consensus target price of Rs 794/- implies a P/E multiple of 17x on EPS of Rs 45.8 for the year ending Mar-21E.