Lupin riding on key mkts' growth

After hitting an all-time high of Rs 1,003 on March 3, Lupin has corrected marginally. However, investors should view any correction as a buying opportunity.  The company’s stock has been an outperformer for quite a while due to an increasing niche products’ pipeline in the US. And, given the company’s growth prospects are improving, primarily led by a strong US pipeline and improving growth in India and Japan, there is potential for further gains.

Strong U S pipeline
Lupin, the third-largest Indian pharmaceuticals company by value, is further strengthening its position in the US market through aggressive first-to-file launches. In recent months, the company has launched about half a dozen generics, with 180-day exclusivity. An exclusivity period is one during which a company is allowed to launch its generics (identical) version of a drug going off-patent. Usually, this period sees limited competition, with better profit margins for the generics producer.

The latest launch by Lupin is ciprofloxacin oral suspension, the generic equivalent of Bayer’s Cipro Oral Suspension (for the treatment of infections), with annual US sales of $9 million. The other generics launch is of anti-bacterial doxycycline. Though the ciprofloxacin oral suspension has a smaller market size of $9 million, as Lupin is the first filer, it is likely to face limited competition for the product. While doxycycline may see multiple players in the market, Lupin is likely to garner strong benefits. This is because of a supply shortage for the drug’s generics, also a reason why innovator Acqua Pharma still holds 73 per cent market share.

Analysts at Nomura believe doxycycline could fetch Lupin $20 million of revenue in FY15. Though some analysts such as Sarabjit Kaur Nangra at Angel Broking see lower revenues of $5 million, the approval has come as a surprise for most analysts, as they had hadn’t factored this into their estimates.

Lupin expects its US sales and profitability to be driven by a strong pipeline of niche products. In the March 2014 quarter, revenue is likely to be driven by the generic launches of Trizivir (HIV treatment drug), Triplix (cholesterol-lowering), Cymbalta (anti-depressant) and Zymaxid (antibacterial eye-drops). While the first three were launched at the end of the December 2013 quarter, Zymaxid was launched in October 2013. Even after the 180-day exclusivity period for the Zymaxid and Triplix generics ends, these are likely to see limited competition. Cymbalta has already seen its market share rise 30 basis points to 11.5 per cent,  according to recent IMS data.

Among the interesting generics launches awaited in the near-term are those of Niaspan (cholesterol-lowering), which will strengthen Lupin’s lipid-control drug portfolio. Lupin, which has brand Antara in this segment, also launched authorised generics to counter competition. In the same segment, Lupin’s generic launches of Tricor and Triplix continue to provide momentum. The company is also building its oral contraceptive portfolio, which will get a boost from the launches of Yaz and Loestrin.

For the company, the long-term visibility looks good. The company’s research and development investments remain high, with a focus on niche specialties (in the US) such as dermatology, respiratory and opthalmics, in which competition is limited.  A company’s spokesperson said there was less competition for areas such as oral contraceptives, ophthalmic, derma, complex injectables and inhalation, where the barriers to entry are high and the number of players few. “So, if one has the relevant technological competencies, be it in research, manufacturing or is vertically integrated for the therapies, one can very well invest in creating a pipeline for these segments.”

Hitesh Mahida at KR Choksey Shares and Securities says three of the company’s products in the pipeline (two in respiratory and one in dermatology) might be launched by 2016-17, strengthening its niche dermatology and respiratory range.

Last year, Lupin had 31 approvals in the US, the most by an Indian pharmaceuticals company. It expects to launch 25–30 products a year, with a focus on obtaining marketing exclusivity in the US by being the first to file for regulatory approvals.

Japan, India recovering
Domestic growth, which was affected by the National List of Essential Medicines, is now improving and is likely to recover fully by the June 2014 quarter. Similarly, the Japanese business (which accounts for 13 per cent of revenue), currently under pressure, is likely to perform well in time, as $12-15 billion of generics may go off-patent in Japan through the next three years.

As a result, most analysts remain upbeat on the stock. Arvind Bothra at Religare Capital Markets says Lupin remains his top pick, owing to high growth visibility (23 per cent compounded annual growth rate during FY13-16). He had already raised his December 2015 target price to Rs 1,160 (against Rs 1,115 earlier).  Ranjit Kapadia at Centrum Broking has a higher target price of Rs 1,230, while analysts at Nomura retain a ‘buy’ rating, with a target price of Rs 1,053. The consensus target price (according to a Bloomberg poll after the December quarter results) stands at Rs 1,055, 10.2 per cent higher than the current Rs 957.