Lupin: What Investors Can Do Post Approval

Lupine has been in the news lately. After last week’s massive approval of gSpiriva HandiHaler, there have been media reports that Lupine is planning to create its own API module for value unlocking. In the midst of Spring of Hope, the share price is up 35 percent this fiscal year, with the stock trading at 35/24 times earnings in FY24/FY25. Valuation premium (33 to 60 percent premium over peers) is an initial factor in the rate Compound annual earnings growth of 100 percent expected in FY23-25.

But stepping back amidst the news frenzy, Lupine’s revival comes from a very weak base. Product approval supports a higher likelihood of revival. But even after successful implementation, the company will be at the lower end of its peers based on the size and scope of US business, India growth and gross margins. We recommend that investors hold the stock at the current level — where the execution risks associated with a rebound, as well as room for further improvement, are evenly balanced.

API truncation

The bid to open an API unit could be directed toward higher debt on the books (twice net debt to EBIDTA as of March 31, 2023) or to fund other acquisitions. Lupine spent Rs 1,000 crore on acquisitions in FY23 itself, including two US respiratory brands (Rs 620 crore) to mobilize its respiratory portfolio. On final cut-off for separation or sale, the valuation of the unit may be closer to Rs 2,200 crore to Rs 2,800 crore or 5-6 per cent of the market value. This comes after applying a 20-40 percent price-to-sales discount to Glenmark Life Sciences (Glenmark Pharma also privatized its API business) to account for lower revenue volume and lower margins for Lupine.

Lupine’s API unit accounts for 7 per cent of FY23 revenue after reporting steady growth in revenue in the past five years to INR 1,109 crore in FY23. Exit growth is at 46 per cent year-on-year in the quarter Fourth of fiscal ’23 is positive but likely to be waning. The API sector is facing post-Covid headwinds, due to high inventory in channels, supply chain issues, Chinese competition, and declining general sales value in the US. Headwinds may subside in fiscal ’24, but the revenue acceleration is still not flat.

Bet on the American part

Against US revenues of $1.2 billion in fiscal 2017, Lubin reported $632 million in fiscal ’23, and saw the largest decline among its peers. US markets figure prominently in Lupin’s strategy and gSpiriva should help turn the tide in its favour. The product alone is expected to generate $100 million in FY24, assuming a 50 percent discount/discount on price and gradually increasing market share. . This is after adjusting the market share that belongs to the advanced variant of the innovator.

Most importantly, the product should have a longer tail as an innovator, a generic licensed innovator (eventually) and Lupine will take part in a market where new entrants have yet to be announced. The current public finances are also expected to see the launch of several products with limited competition, such as gDarunavir, gDiazepam gel, gVarenicline, gNascobal, and gProlensa, which should boost US revenues into the mid-teens growth period in FY24. Also, the core company has “improving” many of the earlier low-margin oral solids, which should provide a favorable base. Pricing pressure in the rest of the underlying portfolio is also mitigating single-digit erosion, providing a tailwind.

The medium-term portfolio (3-5 years) will be shaped by R&D investments in inhalation, injection and complex products in which the Company is currently investing. for release in the United States. The pipeline currently includes three inhalable nasal sprays, four injectables and two more complex products.

Margins

Compared to the peer group’s EBITDA margin range of 22-24 percent, Lupine reported a margin of 11 percent in FY ’23, which is 800 basis points below its EBITDA margins for fiscal 2018. This comes after Lupine got involved in Significant cost savings program per year. Direct costs of product installation, supply vendors, shipping alternatives, workforce and sales force productivity, optimized R&D budget, and a lower percentage of authorized sales (lower margin) were targeted. The company has secured more than half of the targeted savings of Rs.550 crore, while the remainder is expected to come in FY24. According to the company, the fragile improvement in margin resulting from these measures is masked by input cost inflation, price erosion in the US and lower revenue base. .

Lubin expects to achieve 15% EBITDA margin in FY24 and an exit rate of 18%. Assuming a 40 percent EBITDA margin for sales of gSpiriva, this product alone should account for 10-12 percent of EBITDA in FY24. The remainder of the cost savings program and less US erosion could be a marginal tailwind but less insight .

Even in a year of margin turnaround, headwinds are still to be expected. Lupin’s sales in India were also underperforming (1 percent growth year-on-year in FY23) as Diabetes (the leading segment) faced generic competition along with another leading cardiovascular product. The impact of diabetes products is expected to creep into FY24 sales growth as well, though Lubin forecasts low double-digit growth in India. The company also added 1,000 medical representatives to halt its decline in the domestic market, which would be a drag on the margin initially.

Despite the strong US portfolio and improvement in domestic sales, the large gap in peer group margins even after improvements, along with the existing plant condition, is a negative for Lupine. The major plants that are not yet out of the FDA’s notes are the Tarapur API plant and the Pithampur and Manideep formulation units.

The room for improvement is great as has the decline in recent years. At 34 times earnings for FY24 versus a compound annual growth rate (EPS) of 100 percent in the next two years, investors can hold the stock since risk return is equally outweighed.