Lupin Ltd. share price target

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

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.

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,...

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.

Core Q2 EBITDA, normalised for licensing income, was a 5% miss at Rs 6bn (flat QoQ).

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...

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

The USFDA's warning letter (WL) on Mandideep plant identified a long list of Change in Estimates | Target | Reco activities to address the operational deficiencies. Besides, LPC has to...