Despite positives, Lupin not a re-rating candidate

Review will be driven by warning letter resolution

The Lupin stock has been on an upswing after the USFDA approvals, launches, progress on the biosimilar front and robust growth in the domestic business. It is not surprising that the stock, which has been an underperformer in the previous couple of years, has gained 23 per cent since its lows in May.

While pricing pressures in the US market have been weighing on its financials, product approvals and launches, including some niche products, will expand its revenue base and margins. Among the triggers are the recent announcement of about five product approvals and four launches.

The company plans to improve its runrate further during the year. This includes the launch of Solosec, an antimicrobial drug. Solosec is likely to contribute $150200 million to annual sales, according to analysts, though the ramp-up may be gradual.

On the positive side, this launch is expected to offset the price erosion in another brand, Methergen. It is used to treat postpartum hemorrhage. While Solosec and other product launches will negate some of the pressure on US sales, analysts believe the company will need more product launches, such as antianginal medication Ranexa generics, for growth.

Analysts continue to be cautious given the USFDA's warning letter to Lupin’s plants in Goa and Indore, resolution of which is necessary to improve growth visibility. Overall, beaten down sentiments have got a boost but analysts are awaiting further triggers to revise earnings estimates. Analysts at Morgan Stanley recently pegged Lupin's target multiples at a 10 per cent discount to industry multiples, given the warning letter for its plants, ongoing pricing pressure in the US, forex and regulatory risks in the emerging markets, and profit concentration in diabetic products in the US.

While earnings cuts are likely coming to an end, rerating is expected once business visibility improves with resolution of the warning letter at key plants, approval of complex generics, and specialty products.

The company has been increasing investments by developing its specialty product pipeline, which is looked at positively.

While the company's recent announcement on a tie-up in Japan for launching biosimilars is positive, the key to earnings improvement continues to be the launches in the US, said Ranvir Singh of Systematix Shares.

Analysts continue to be cautious, given the USFDA's warning letter to its plants at Goa and Indore, resolution of which is necessary to improve growth visibility