by Suhani Adilabadkar

The pharma company Lupin (and one of Rakesh Jhunjhunwala's portfolio stocks) has gained 56% from its 52-week low and jumped 21% over the past one month. Even with the muted backdrop of the December quarter, Lupin has stirred investor interest due to recent product launches, a robust ANDA pipeline and the receipt of the Establishment Inspection Report (EIR) from the USFDA for its Aurangabad and Florida facilities. Headquartered in Mumbai, Lupin develops and commercializes a wide range of branded and generic formulations, biotechnology products and APIs in over 100 markets. 

The company enjoys the leadership position in cardiovascular, anti-diabetic, respiratory segments and has a presence in the anti-infective, gastro-intestinal (GI), central nervous system (CNS) and women’s health segment. Lupin is the third largest pharmaceutical company in the U.S. by prescriptions and in India by global revenues with eighteen manufacturing sites and seven research centres across India, US, Japan, Brazil and Mexico.

Quick Takes:

• Lupin is the third largest pharmaceutical company in the U.S. by prescriptions and in India by global revenues.

• The December quarter was impacted by Gavis impairment and disinvestment of Japanese business. 

• Lupin has received EIR from the US FDA for its Aurangabad and Florida facilities. 

• The company is focussing on complex generics, biosimilars and specialty to spur its global growth engine. 

• Lupin estimates that after a June quarter FY21 that has been impacted by lockdowns, things should return to normal from Q2FY21.

Muted December quarter, operating margin decline

Lupin reported a revenue decline of 16% YoY impacted by its disinvestment of the Japanese generics business and decline in US generics business. Revenues were reported at Rs. 3,769 crore in Q3FY20, compared to Rs. 4,505 crore in the same period, previous year. Operating profit stood at Rs. 429 crore in the December quarter FY20 against Rs. 752 crore in Q3FY19 falling 43% YoY due to higher R&D expenses, remedial costs and promotional expenses. 

Operating margins came out at 11.4% in Q3FY20 compared to 16.7% in the corresponding quarter previous year. In addition to lower revenues, exceptional loss of Rs. 289 crore pertaining to Gavis IP impairment (Rs. 1,580 crore) offset by disinvestment proceeds (Rs. 1,291 crore) led to a net loss of Rs. 841 crore for the December quarter FY20. With respect to Gavis impairment, Mr. Rajiv Pillai, Sr VP, corporate planning, said, “The Gavis impairment improves our PBT. It positively impacts our tax rate, ETR. Also, the lightening of the balance sheet on account of both these events improves the ROCE by close to 300 bps”. 

Movement away from generics

The fifth largest Indian pharmaceutical company was trading at Rs. 2,000 levels in 2015 and has corrected roughly 60% in five years. Like the rest of its peer group after facing the heat of channel consolidation and pricing pressure in the USA, Lupin has changed antennas of its growth engine. I The pharmacy of the world for generics is slowly moving towards complex generics, biosimilars and specialty drugs. The cost of development of this growth direction is higher, with longer timelines and intensive R&D, leading to 10-20 times higher expenditure compared to its plain vanilla generic counterparts. 

The last three years have been tough for Lupin due to severe challenges faced with respect to US generics business and regulatory challenges (warning letters received for five facilities, which are still to be resolved). By the end of FY19, the ship seems to have stabilized with a turnaround of US generics business as price erosion declined to single digit from high double-digit scenario. Though, US generics business is very much in the future revenue landscape, another pentagonal matrix energised by Lupin’s management over the years is expected to run its future growth engine. 

This pentagonal matrix has ignited interest among investors, mainly with respect to its efforts in complex generics, biosimilars and specialty segments in the light of its heavy R&D budget (more than 10% of sales), one of the highest among its peer group. After a couple of years of R&D, the first vertex of the growth matrix of Lupin is on the cusp of commercialization of a number of complex generic products starting with Levothyroxine (thyroid treatment), launched in Q4FY19. 

Lupin is the only other player apart from Mylan in the market and the product is currently being ramped up. In this respect, Ms. Vinita Gupta, CEO, Lupin said, “We expect levothyroxine to make a reasonable impact this quarter onwards and will certainly be a major product for us in fiscal year 21”. In the same frame of complex generics, injectables are still work in progress and inhalation products such as albuterol and fostair are expected to be launched next fiscal with multiple products in development pipeline such as gSymbicort, gDulera and gFlovent. 

Lupin also made a renewed foray into the specialty segment by launching Solosec (to treat bacterial vaginosis) in US and Namuscla in Europe, entering women’s health segment in US and neurology in Europe. Speaking on Solosec potential, Ms Gupta said, “We are still targeting $150 million, 15% share of the market. Given the fact that we have 7 plus years of exclusivity on this product, we have a good runway and are completely committed in building the product to that 15% share that we have targeted”. Solosec revenues have jumped 48% sequentially in Q3FY20. 

The third vertex is biosimilars for Lupin with Etanercept (treating rheumatoid arthritis), its first biosimilar launched in Japan. It has recently received positive opinion from European Medicines Agency's Committee for Medicinal Products for Human Use (CHMP) which will  be considered by European Commission for approval of Etanercept’s biosimilar. Next in the pipeline are Pegfilgrastim and Spiriva to be filed in the next fiscal.  

The final growth vertices are with respect to its diversified revenue base where US markets only contribute 34%, rest of the pie is shared between India 29%, developed markets (ex US) with 18% share and EMs stand at 10%. Domestic Indian markets have played an important role in providing the requisite balance in volatile times, outperforming consistently. Domestic business is mainly 95% branded generics and 5% trade generics with its chronic (inhalation, diabetes, and cardiovascular) portfolio being one of the best in the industry contributing 60% vis-à-vis acute with 40%. 

Domestic business has grown 9% YoY at Rs. 13 bn contributing 29% of its revenues in Q3FY20. The ex US markets are also holding up well, Mexico (up 7%), Brazil (up 14%), South Africa (up 6%) and Germany (up 38%) YoY in Q3FY20. So, these five growth vertices tied to consistent domestic business, emerging markets growth, complex generics monetization, enhancing specialty segments and filing new biosimilar products, will give a long runway for growth to Lupin to regain some of its old sheen. 

COVID-19 Impact: Management expects normalization in September quarter

The Indian pharma sector is emerging as a significant part of the COVID-19 response, but the industry is also facing headwinds with respect to labour and raw material shortage, supply chain disruption and lower production. 

Mr. Nilesh Gupta, MD, Lupin clarified that the company is trying its best to maximise production and provide essential drugs to various geographies in India and across the world. He further added, “The biggest problem faced is the processes happening in our facilities, ancillary supplies, packing material, solvents, solvent recovery and people who take away by-products are severely disrupted”.

Mr. Gupta reiterated that in the current situation, Lupin is focussing on maximising production and its availability. Lupin estimates that after a June quarter FY21 that has been impacted by lockdowns, things should return to normal from Q2FY21. Management’s guidance of ending the year with an EBITDA margin of 18% and moving northwards from Q1FY21 might be disrupted.