Lupin slips to ~7.8 bn loss in Q4

While pricing pressures affected growth in US, impairment provisions led to the loss

Drugmaker Lupin aims to maintain 19-21 per cent Ebitda (earnings before interest, taxes, depreciation and amortisation) margin in FY19 on the back of cost optimisation and new product launches even as it reported a ~7.83 billion loss in the fourth quarter (Q4) of FY18.

A 21.1 per cent fall year-on-year in North American formulation sales was largely responsible for the company posting a 5.2 per cent decline in revenues in Q4. The decline came despite rising sales in India, Asia-Pacific (including Japan), Europe, Middle East & Africa (EMEA) and Latin American sales.

The stock was down 4 per cent intraday before closing at ~750.85, down 0.46 per cent. While the US sales were disappointing, what weighed on the income statement was impairment losses. A onetime impairment provision of ~14.64 billion was taken on certain intangible assets as a part of the Gavis group acquisition. “We took a one-time impairment on the Gavis acquisition in line with the changed market conditions, in particular with the opioids in the US,” Lupin Managing Director Nilesh Gupta said. The opioid drugs came into the company's portfolio following its $880 million acquisition of US drugmaker Gavis in 2015. With the US government tightening control on pricing of opioids, their sales have taken a hit.

“We have seen an underperformance in sale of certain molecules and we have made impairment provision on a conservative side. We continue to sell these molecules but their sales have come down,” said Ramesh Swaminathan, Lupin's chief financial officer. Adjusting for this, net profit would have been ~3.58 billion. This would have been in line with the consensus analyst estimates of ~3.38 billion as indicated by Bloomberg.

Moving forward, the company expects a high single-digit pricing pressure in the US to continue. Lupin plans to overcome some of this with new product launches. The company launched 11 products in the US market during the quarter and 23 products during the year. This on the positive side, led by US sales, which improved slightly in the March quarter over the December quarter. The trend will be watched moving forward.

Chief Executive Officer Vinita Gupta said the company had seen growth in all geographies except the US, where it continued to face competitive pressure and price erosion. She added that the company is focusing on new product launches in the US including women’s health drug Solosec. Though the company’s brand Methergine (for treating postpartum haemorrhage) is doing well, the same may see generic pressure during the year ahead. Thus a new launch (Solosec) expected in June will be able to compensate for the losses in Methergine, feel analysts.

While the company, looking at the pricing pressure challenges in the US, has not provided any growth guidance, Swaminathan expects the company to maintain operating profit margin in the 1921 per cent range in FY19.

The management also indicated it is on track to resolve warning letters issued to its Indore and Goa plants and will share updates with the US drug regulator later this month. Warning letter resolution will be crucial for new product launches and to drive US sales growth.

As the company is trying to stabilise and arrest the decline in US sales, analysts feel new triggers on earnings growth will be visible over a period of time. Analysts at Motilal Oswal Securities say although the stock faces near-term pressure, key approvals in the US and resolution of the warning letter status (expected in 12 months) are triggers.

Analysts such as Ranvir Singh at Systematix Shares, too, does not see many re-rating triggers in the near-term as new major product approval and launch visibility in FY19 remains limited on the back of pending warning letter resolution.

“We ended the year on a positive note with growth across all our key markets. We have made meaningful strides in our complex generics pipeline, made progress on the speciality products across US, Europe and Japan and have had strong growth in the emerging markets, especially India. Our near-term priorities are resolution of the warning letter on Goa and Indore unit and successful commercialisation of Solosec in the US,” the Lupin MD said.