FDA challenges may keep Lupin a laggard

Better US sales trajectory, margin key triggers over a couple of quarters

The Lupin stock has slipped over 6 per cent since mid-september highs, with observations for its Goa plan adding to the downtrend. Though fresh worries over regulatory compliance are negative, launches from approved sites, recovery in US sales and operating profit margin in the coming quarters, and strong India business are keeping brokerages confident about the company’s prospects.

In the near term, the stock would likely remain under pressure given its regulatory track record and observations across multiple sites catering to the US market. After the Somerset facility in the US, which received a warning letter (WL) in June this year, Goa is the second facility to have regulatory action in the last four months. In a previous note on Lupin after the WL on Somerset, analysts at Nomura Research had highlighted that the development was a setback and indicated the company’s continued struggle on the US FDA compliance front, particularly with respect to older facilities.

Besides Somerset, the company’s formulation sites at Indore, Goa and Mandideep, and active pharmaceutical ingredient (API) site at Tarapur are classified as “official action indicated”, which means major compliance issues following inspections between 2017 and 2019. The silver lining, according to analysts, is that the new facilities at Indore (unit III) and Nagpur, and the API site at Visakhapatnam inspected between 2019 and 2020 have successfully gone through a US FDA audit.

The company indicated that it is confident of addressing the observations satisfactorily and comply with the good manufacturing practices across its facilities.

The Goa facility, which makes oral solids, accounts for over a quarter of revenues, according to Kotak Institutional Equities. In the latest inspection, the Goa site — which has had regulatory issues since 2017 — received seven observations.

Though there have been additional regulatory hurdles, Motilal Oswal Research maintains its earnings estimates, as potential inhaler products are on track for approval and are from a US FDA compliant site. The brokerage, however, points out that asset turnover remains impacted due to lack of approval from sites under the regulatory cloud.

The Street will keep an eye on the US sales trajectory; the company has guided for sales in that geography to cross $200 million by the December quarter of FY22 on the back of a ramp-up in inhalation products Albuterol and Brovana, authorised generic. The sales run-rate has been lower than analyst estimates, with June quarter sales of $172 million. The margin trajectory, India sales growth, and product launches are the other triggers for the stock.

The stock has been underperforming its peers over the past year given the regulatory issues, lower sales in the US market, and higher valuation. While the brokerages are positive about the stock, investors should await a pick-up in US sales and the margin before considering an investment.

After the Somerset facility in the US, which received a warning letter (WL) in June, Goa is the second facility to face regulatory action in the past four months