Tuesday, February 7, 2012

>LUPIN: US outlook strong on c25 launches in FY13 – Geodon, Combivir, Tricor and oral contraceptives – Yaz, Yasmin

OW: Higher costs and tax clip upside
  • Sales beat our estimates by c7% largely because of favourable rupee depreciation. India up 30%, US 24% and Japan 43% yoy
  • US outlook strong on c25 launches in FY13 – Geodon, Combivir, Tricor and oral contraceptives – Yaz, Yasmin
  • Costs remain high, tax to increase. Maintain OW, TP unchanged at INR560

■ Lupin’s reported 3QFY12 net profit of INR2.35bn was up c5% yoy, in line with HSBCe (c3% lower than consensus) and affected by a higher tax rate in the quarter. Net sales at INR18.2bn were 6.4% higher than our estimate, essentially because of favourable currency. 3QFY12 also included the integration of recently acquired I’rom pharma in Japan for one month. This, along with the increase in salesforce, R&D and depreciation, limited overall net profit growth. Sales include a forex loss of INR260m.

 India growth solid, US outlook strong: India formulation sales grew 30% for the quarter, assisted by recovery in the anti-infectives segment and improved traction from Lilly and new launches. US grew 12% yoy on constant currency, in line with our estimate. Suprax grew 21%, whereas Antara was up 8% yoy on constant currency. Within generics, the company expects to launch c25 products this year including generic Geodon, Combivir and oral contraceptives. Additionally, Lupin is entitled to launch generic TriCor in the next fiscal year, as per settlement. Though the exact timeline is not known, we expect it to be around mid-2012. The company has filed three ANDAs this quarter.

 Maintain OW and TP of INR560: We make changes to our currency assumptions from INR45 to INR48 for FY13 and reduce sales from Fortamet, oral contraceptives, while at the same time increase India and Japan. We incorporate I’rom numbers, which add cUSD70mn to sales in Japan, though at the same time increase costs. We additionally increase our tax rate assumption to 20% for FY13 as per guidance. The net impact is EPS changes of c2% and -2% in FY13 and FY14, respectively. We continue to value Lupin at 22x September 2013e EPS of INR25.4 to derive our TP of INR560. The near-term catalyst is the launch of generic Geodon in March 2012. The key risk is earlier-than-anticipated entry in Suprax and continued higher costs resulting in subdued margin expansion. Additionally, incremental generics in June in atorvastatin could affect sales from simvastatin.

Conference call highlights
1. India formulations: Domestic sales were stronger in 3QFY12 because of a recovery in antiinfectives sales and the contribution from the newly set-up metabolic division (includes Eli Lilly’s business). Lupin is doing cINR90-100m per month under the Lilly deal. All key therapies like CVS, diabetes, gynaecology and anti-asthma grew well in the quarter.

2. US formulations: On a constant currency basis, US sales grew 12% yoy for the quarter with 9% growth in the generics business and 18% growth in the branded business.

a. Branded business: Robust growth seen in the Suprax franchise (suspension constitutes 60% and tablets form the rest of the total prescription) with tablet form growing 32% yoy and suspension form growing 21% yoy in the quarter on a constant currency basis. Antara grew 8% in 3QFY12 and gained market share in the last few weeks. Management does not foresee generic competition in Suprax in the near term; 9M branded sales were cUSD100m. AllerNaze launch remains uncertain.

b. Generic business: Generic outlook remains strong for FY13 with nearly 25 generic launches planned, including 10 oral contraceptives. Big launches include generics of Geodon in March 2012 and Combivir in May 2012. The company expects four players in generic Geodon (including authorised generic). Generic launch of TriCor and oral contraceptives, including bigger OCs such as Yaz and Yasmin, are also expected in the next fiscal year. The company has gained c20% market share in Ultram ER generic. On Fortamet, Lupin has appealed the injunction and is waiting for a hearing. It is also yet to launch generic Solodyn in the US market.

3. Kyowa growth was strong in Japan. The company expects an incremental margin improvement to come from the bulk transfer to India for Japan formulations.

4. R&D for the quarter was INR1.4bn at 7.9% to net sales. The company has filed three ANDAs in the quarter – cumulative 156 ANDAs. Seven ANDAs were approved in 3QFY12.

5. Capex was INR1.45bn for 3QFY12. The company expects to pay a tax rate close to MAT (minimum alternate tax) in FY13.

Valuation and risks
We continue to value LPC on PE methodology and use 22x one-year forward PE multiple for its core earnings. Given that LPC is one of the fastest growing companies in domestic market, where the slowdown is hurting its peers, we think a higher valuation at c20% premium to the sector average is justified. Under our research model, for stocks without a volatility indicator, the Neutral band is 5 percentage points above and below the hurdle rate for Indian stocks of 11.0%. Our target price of INR560 provides a potential return of 26.5% including a forecast dividend yield of 0.8%, above the Neutral band of our model; therefore, we rate the stock Overweight. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated.

The key risk is earlier-than-anticipated generic entry in Suprax and continued higher costs resulting in subdued margin expansion. Additionally, incremental generics in June in atorvastatin could affect sales from simvastatin.