Lupin’s tonic for growth PAVAN LALL

One of the world’s five worst performing pharma stocks last year is showing strong signs of revival under its second-generation leadership team but the going is still tricky

Just days ago, pharma major Lupin Limited made an announcement to the stock exchanges that it had received an establishment investigation report from the US Federal Drug Administration for the successful inspection of its Pithampur plant that had been subjected to an investigation in summer last year.

In the statement, Nilesh Gupta, Lupin’s managing director, said, “The successful outcome of this inspection is encouraging and further validate our commitment to meeting global manufacturing standards.” Before that on April 3, the company issued another press release referring to the completion of the successful inspection of its Goa facility by the UK Medical and Healthcare Regulatory Agency (MHRA) with no critical observations.

These statements represent a resuscitation of a company that has seen some major fluctuations in its performance over the past decade. Between 2000 and 2015, Lupin saw its market cap increase over 900 per cent. A share that cost ~5 in 2000 hit an all-time high of ~2,107 (adjusted for bonuses and splits) in 2015 — up more than 400 times. No surprise, then, that ace investor Rakesh Jhunjunwala’s returns on it were so stupendous — at 14,000 per cent — that it overshadowed all his other multi-baggers which included Titan (8,300 per cent), Crisil (5600 per cent), and Rallis India (655 per cent). Yet in the past year, the generics drug maker became one of the five worst performing stocks across the world, according to Evaluate, a UK-based market intelligence company. Its stock priced crashed by almost 50 per cent, and shareholders saw close to ~600 billion evaporate into thin air. To be fair, Lupin isn’t isolated and other Indian pharma majors such as Sun Pharma and Cipla have also seen similar wealth erosion.

So what happened? There is no single reason for it, say analysts who track the sector. For one, Lupin’s biggest book of business is America, which accounts for half its revenue but has started to see a slowdown because the industry there and in the West is in a state of transformation with players becoming more specialised. Also, drugstore operators like CVS and Walgreens, which are basically distributors, are seeing massive consolidation and that’s directly pushing price discounts for their drug purchases. Then, Lupin’s acquisition of GAVIS Pharmaceuticals in 2016, which was bought for $880 million–– the biggest for an Indian pharma company overseas and deemed expensive by the market at the time — is yet to become value-accretive, which management had said it would.

The US FDA and other agency warning letters to the company’s plants in Goa and Indore in November last year raised further panic that caused the scrip to plunge another 20 per cent. Those issues have been addressed now, but one market, Japan, which was likened as a hedge for other geographies and where Lupin does business of some $300 million, is also seeing margins erode due to laws that require drugs to reduce prices by 10 to 12 per cent for every year there.

Finally, Lupin’s management also saw upheaval caused by the passing away of founderchairman D B Gupta, which thrust the mantle of leadership onto the next generation. Siblings Vineeta Gupta and Nilesh Gupta are already actively involved and are seasoned and hands-on promoters, but any high-level change always means a minimum readjustment period for how a company’s leadership combine their abilities and chart out new strategies.

At the heart of its strategy, Lupin has to attempt a reinvention that is built on specialisation while harnessing its geographic strengths. That could work towards being a firm that makes drugs for skin, eye and cancer-related diseases but the developmental costs will be in the tens of millions of dollars if not more, and if and when acquisitions are to be made, execution has to happen at warp-speed if Lupin is to bounce back quickly. In Europe, its presence and penetration has no real scale to talk about and that’s another area for growth. Fundamentally, what this means is that it is in India where the game must pick up, with alternate potential markets that include South Africa, Mexico, and Brazil.

There appears to be a short-term glimmer of hope. According to a recent report by Credit Suisse, expectations for the fourth quarter of 2018 for the domestic pharma majors go like this: muted for Sun Pharma, given low approvals; US sales could decline 8 per cent for Dr Reddy; expect US sales to decline 3 per cent and a soft quarter for Cipla due to high R&D. Lupin appears to be the only one that is expected to see a sales pick-up of about 4 per cent.

Going forward, Lupin faces some challenges, biosimilars being one area in which it urgently needs to grow. Across the world, there’s a race to develop biosimilars — basically biologic medical products that are almost identical copies of an original made by someone else but they’re different from generics in that they’re more complex to manufacture, need larger scale clinical trials and as many as 250 quality manufacturing tests as opposed to 50. That also makes them at least five times more expensive to develop. A couple of months ago, Lupin announced that its joint venture with Japanese firm Yoshindo, YL Biologics, completed global phase III trials of its Etanercept biosimilar and had met with successful outcomes for rheumatoid arthritis. Good news, but the truth is while Lupin has another six or seven biosimilars in the pipeline, it ought to have had as many as a dozen late stage approvals by now. What Lupin does have working for it is its young leadership that has been actively engaged with the company and proven performance for statins, diabetes, cardiovascular and respiratory drugs. But where it needs to switch gears is in making the US acquisition sweat profits and looking out for other strategic acquisition targets — which is not out of the question given that they have around a billion dollars they could easily put to work. “The financials are excellent and their leadership is in place, across geographies, with a far more professional management team and board than most others,” says one analyst. “If anyone can pull off a turnaround it’s them.” The company did not respond to queries for this piece.

Pulling off that transformation is just the legacy that the new leadership is entrusted with building. Judging by what the industry says, they have the resolve to bring about that change, and if all the pieces fall into place, it could happen in three years.