Lupin Ltd. share price target

Lupin's Q3 EBIDTA margin came below expectations at 11.4% (down 588bps YoY, down 190bps QoQ) led by higher other exp (remediation cost, higher promotional spend) and R&D cost. Large one offs related to Gavis impairment, Japan divestiture led to reported loss of Rs83.5bn. We resume coverage with a Neutral rating and TP of Rs705/sh based on 20x FY22 EPS. Lupin has an excellent India franchise (35% of revenues, grew at 13% CAGR over last 5 years), however, with 40% of revenues from US, a lot hinges on pipeline execution, outlook for which is contingent on: a) execution of three key assets Levothyroxine (market share ramp up), Solosec (branded product) and approval for gProAir; b) resolution of compliance issues at its US FDA facilities (5 with OAI status including 2 WL). While we factor increased traction in the US and also build margin expansion on back of cost control efforts & operating leverage, valuations at 21x FY22 EPS appear full.

Lupin (LPC) reported a 40% miss on Q3 EBITDA while one-offs dented PAT (incl. US$ 222mn Gavis impairment).

6 February 2020 LPC is focused on building a niche pipeline for the US market and in process to resolve regulatory issues at its manufacturing sites. LPC intends to grow in the branded domestic formulation (DF) segment by (a) introducing new products, and (b) increasing reach. 3QFY20 has been the weakest quarter in terms of margin, impacted by muted US sales and elevated operational expense. We cut our EPS estimate by 7%/11%/5% to factor in delay of (a) potential launches, and (b) realization of benefits due to cost cutting initiatives. We remain positive on LPC based on its healthy ANDA pipeline and improving growth outlook in the branded DF segment. Maintain 3QFY20 revenues were down 4.5% to INR37.7b. US sales were down 3% YoY to USD186m (37% of sales). API sales declined 12% YoY to INR3.2b.

Lupin will not be able to report a strong comeback in US branded business Although Lupin management has guided to achieve sales of USD100-150mn (Rx) in US$600m Bacterial Vaginosis (BV) market in the US (3% CAGR), we expect Solosec to reach peak sales of only US$50-60m (US$3-5mn/quarter currently) and achieve break-even in FY22E. We believe competition from metronidazole due to a) proven track record b) lower price and c) better efficiency (58-100% cure rate) will limit the shift towards Solosec. We expect Metronidazole will continue to be the market leader in Rx, and the preferred...

Divesting Kyowa to pursue profitable avenues of growth: Lupin has entered into an agreement to divest its stake in Kyowa to Unison.

Lupin (LPC) has signed a definitive agreement with financial investor Unison to sell its entire 99.8% stake in Kyowa for an EV of US$ 520mn.

12 November 2019 LPC has entered into a definitive agreement for the sale of its entire stake in its Japanese subsidiary Kyowa Pharma (Kyowa) to Unison (a private equity fund in Japan) for an EV of ~INR37b. Kyowa delivered sales of ~INR17.8b in FY19 and ~INR9b for 1HFY20. The transaction would generate cash inflow of INR21b post tax. Net debt would reduce by INR32b and net debt-to-equity would come down to 0.08x from 0.32x. While the board of directors has approved the transaction, it is subject to the procedural closing conditions, including approval by LPC shareholders. Japans USD13b generic pharma market (as of 2018) exhibited a CAGR of 9% over CY14-18. Japans government is likely to change the rule to an annual review, which implies a further impact on profitability of the countrys generic business. LPC had entered Japans pharma market with the acquisition of Kyowa in FY08. Kyowas revenue CAGR was ~15% over FY15-19 (INR17.

Lupin was the fifth largest generic company in Japan. It was one of the early entrants among Indian peers in the Japanese generic market when the Japanese government was keen to expand generic penetration. The actual growth of Lupin started in Japan post acquisition of Kyowa in 2007. However, in the last few quarters, the growth has been inconsistent due to frequent price cut and lower penetration. Recently, the government steeply increased generic penetration target to 80% (from 60% in 2018) by 2020. To achieve this target, the government has increased the frequency of price cut,...

Revenues and margins lower than expectation: Lupin s revenues increased by 10 percent YoY to Rs 42.9 bn in Q2FY20 lower than our estimates of Rs 45.4

cGMP issues, pricing headwinds in US to the fore Lupin's US business (~38% of revenue) has one of the largest ANDA pipelines comprising 324 filed ANDAs and 151 pending approvals including ~40 FTFs. However, this segment is facing headwinds due to persisting pricing pressure and the recent warning letters (Goa, Indore and Mandideep) and OAI at Gavis plant. The company is looking for branded products and complex generics (biosimilars and injectables) to overcome this issue. We expect sales from the US to grow ~5% to | 6393 crore in FY19-22E due to...