Price erosion still a key concern for Lupin

Recent acquisition & large product pipeline long-term growth drivers; price erosion in US to weigh on earnings

Drug major Lupin, which has been reeling under intense pricing pressure for its key products in the US, is trying to chart a growth path.

Its recently announced acquisition in the US is a step in that direction. The buy will give the company access to the brand Solo sec in the women’s health care segment, besides existing products such as Methergin and a few oral contraceptives (many more products are lined up for approval).

The acquisition of a brand has its own benefits such as better margins and is also a long-term growth driver compared to generics that tend to face competition over a period of time.

Analysts at Kotak Institutional Equities said they considered Solosec to be the right fit for Lupin as it provided the company with an anchor product to expand its efforts in women’s healthcare, has an attractive clinical profile to compete against the existing products, including generics, and is an attractively valued deal with management guiding for a five-sevenyear payback profile.

However, benefits will accrue gradually. Solosec was recently approved for the treatment of bacterial vaginosis, but it is yet to be launched. The product can garner peak sales of up to $100 million. But, it will take a few years for sales to ramp up. For near-term earnings growth, additional triggers are required. Although Lupin has a strong generics pipeline in the US, big approvals are key to fill in for competitive pressure the company is facing for its diabetic product range. The diabetic segment was the key growth driver earlier. Thus, the Street will be looking at the company’s commentary on competitive pressure after the September quarter results, and also at the timeline for large product approvals.

Analysts at Edelweiss and Motilal Oswal Securities estimate the company’s US sales to decline 18-26 per cent yearon-year in the September quarter (Q2) due to an increase in competition and pricing pressure in diabetic products such as Glumetza (authorised generic launched in February 2017 as Teva also launched the generics in May 2017) and Fortamet. Sequentially, sales are likely to be flat, as the company’s launches — Fosrenol (renal treatment drug), Benicar (hypertensive) and Seroquel XR (anti-depressant), among others — will partially offset the impact of Teva’s Glumetza launch.

However, if Lupin reports flat US sales on a sequential basis, it would indicate the US sales have bottomed out and increased launches from here on can drive growth.

For now, while analysts at Motilal Oswal estimate sales to have bottomed out in Q2, they see gains of about 14 per cent for the stock from the current level of ~1,060. Those at Kotak have given a cautious rating, while Jefferies has maintained an “underperform” rating following news of the acquisition. Clearly, analysts are awaiting more triggers.