Weak US sales pull down Lupin show

Operating performance in the March quarter also impacted by one-offs

Sales in the US market and regulatory concerns were weak points for the Indian pharmaceuticals sector in the March quarter; Lupin was no exception. The stock could see some weakness on Thursday, both on weak March quarter results and adverse observations from the US regulator for its Indore facility. Pricing pressure in key products, absence of meaningful launches and rupee appreciation added to its woes. The company’s sales in the world’s largest pharma market declined 13.2 per cent year-onyear (yoy) and 12.6 per cent over the December 2016 quarter. Thus, despite a strong showing in most other places, declining US sales (46 per cent of overall revenue) was bound to put pressure on the performance. As a result, consolidated revenue at ~4,253 crore barely grew (up 1.3 per cent yoy) and came lower than the ~4,369 crore estimated by analysts.

On margins, the company has seen a larger impact, led by one-offs. It made provision of ~156 crore for compensation towards liability on product launch litigation in Australia. Further, the net impact of foreign exchange fluctuation on operating profit was a loss of ~168 crore against a gain of ~26.7 crore in the year-before quarter.

Thus, while reported operating profit of ~826.7 crore marked a decline of a little more than 30 per cent each on a sequential and yoy basis, margins at 19.9 per cent were significantly lower than the 32.8 per cent in the March 2016 quarter and 30 per cent in the December 2016 one. Adjusted for the one-offs, the margins would have been around 27 per cent. In this backdrop, the stock touched a 52week low of ~1,168.10 after the results were declared. However, it recovered sharply to close at ~1,227.65, down 1.7 per cent on Wednesday.

The net profit at ~380.2 crore, aided by lower taxes, were half of what these were a year before. The pressure on US sales was, however, expected. Launch of a generic version of diabetic drug Glumetza and price hikes taken in another generic, on diabetic drug Fortamet during the March '16 quarter, had driven US sales in calendar year 2016. However, with these launches coming under pricing pressure, overall sales were bound to be hit.

The company saw 18 approvals for new launches during the second half of FY17, though meaningful approval in terms of size came only at the end of the March quarter. Approvals for exclusivity launches in generics of oral contraceptive drug, Minastrin and limited competition HIV drug Epistone's generics should lead to a better June quarter.

On the positive side, the Methergine brand (used in childbirth) has achieved a $5560 million annual rate, improving month after month after the launch a year before. The company plans to launch another 20 new products in the US during FY18. The major boost, though, will be provided by launches of generics of cholesterol treatment drug Welchol and hypocalcemia drug Renvela, approvals for which are expected only in the second half of FY18. Thus, double-digit growth should come back by FY19 for US sales.

For the domestic business, too, FY17 was a challenging year. New drug price control orders and the note ban added to the problems. However, 14 per cent growth in the March quarter and 10.6 per cent growth in FY17 are encouraging.

Though destocking prior to implementation of the goods and services tax might lead to a temporary disruption, FY18 should be a better year. The company usually launches 4050 new products a year and should be able to achieve high double-digit growth, said chief executive Vinita Gupta. She is also confident of maintaining strong growth in other regions.

In this backdrop and assuming no new issues with the US drugs regulatory agency, the stock could be looked at by long-term investors. Trading at 16-18 times the FY18 estimated valuation, it is cheap, say analysts. Sarabjit Kour Nangra, vicepresident at Angel Broking, said maintained her 'buy' rating on the stock.