Lupin: Gradual recovery ahead after a weak Q1 show

Higher-than-expected price erosion in US weighs; sequential improvement in margins bright spot

It was expected that Lupin’s US sales for the June quarter would be a disappointment. The company did not meet even the low expectations. Its North American sales (42 per cent of revenue) declined 26.8 per cent year-on-year (y-oy). Analysts at Motilal Oswal Securities had anticipated the US business to decline 18 per cent over a year due to competition to its generic equivalent of diabetes drugs Glumetza and Fortamet. It's not only a y-o-y decline on a high base but a sequential decline of 15.8 per cent, indicating a continuing trend of sharp price erosion. The performance comes despite launch of generics of oral contraceptive drug Minastrin on exclusivity and limited competition HIV drug Epistone's generics. Glumetza has seen larger than expected price erosion.

India sales, a fourth of revenue, did better than expected. Despite GST-led destocking, domestic sales declined only 1.8 per cent over a year, which analysts say is better than the industry's. On a sequential basis, domestic sales growth of 6.1 per cent provided some cushion.

Revenue from Japan grew 10 per cent over a year. Other smaller geographies, which contribute up to seven per cent to sales, grew 3-17 per cent over a year, though these were not enough to mitigate the impact of lower US sales.

Overall sales at ~3,807 crore declined 12.3 per cent over a year and 8.5 per cent sequentially. This was lower than the Bloomberg consensus estimates of ~4,278 crore. The operating profit, at ~768.3 crore, down 41.4 per cent over a year and 1.7 per cent sequentially, came lower than the consensus estimate of ~982 crore. At the net level, profit at ~358 crore missed the consensus estimate of ~522 crore by a significant margin.

The company, despite all odds and lower US revenue, managed to report a margin of 20.2 per cent, compared to 18.8 per cent the previous quarter. This was also helped by cost control. The quarter numbers will be looked at as a base for margins, as most part of the price erosion in the diabetics portfolio has already played out, feel analysts, who will be looking at recovery from here. The company said the base business had grown sequentially and the worst was over.

On the positive side, recently concluded inspections at its Goa and Aurangabad facilities were cleared without any major observations by the USFDA. This should also lead to a surge in approvals. Significant larger approvals on exclusivity such as for lipid control drug Welchol and a kidney drug, among others, are expected but not before the last quarter of FY18, and will reflect in largely in FY19. With lower than expected Q1 performance and kidney treatment drug Renvela’s generic launch approval bagged by Aurobindo, for which Lupin was a contender, analysts' earnings estimates will see some cuts.

The stock, that had seen new 52-week lows on Tuesday, rebounded to close 1.7 per cent higher on Tuesday at ~1,034.25.