Perfect prescription


With its robust product pipeline, attractive return ratios, focus on complex generics and steady growth in domestic formulations, Lupin presents the best long-term investment opportunity in the pharma sector

The CNX Pharma Index has seen a few corrections after touching a high of 13,831 in April 2015. Though August saw some recovery, it gave away the gains caused by overall weakness in markets. However, the last few trading sessions have witnessed revival in the momentum for pharma stocks as the earning season is nearing. Dollar movements over the past months also augur well. The currency tailwinds in the rest of the world do raise some concern. However, we see only companies like Dr Reddy’s, Torrent Pharma and Glenmark getting affected because of their presence in countries like Venezuela, Brazil and Russia.

The US Food and Drug Administration (FDA) approval rate has picked up recently. It approved 61 abbreviated new drug applications (ANDA) in September, the highest ever after the implementation of generic drug user fee amendments (GDUFA) guidelines. Indian companies accounted for approximately 20 per cent of these approvals. Companies like Aurobindo and Lupin have seen 14 and 18 approvals, respectively, in this fiscal so far. However, companies like Dr Reddy’s, Cadila and Sun have been facing delays in receiving ANDA approvals due to compliance issues at their facilities.

A few interesting launches done early in the fiscal like the generics Abilify and Nexium continue to remain interesting opportunities as there have not been any significant increase in competition. Torrent Pharma and Alembic Pharma were the only Indian companies to launch the generic for the $5bn-drug Abilify in April. The competition remains limited to five generic companies and both Indian companies have held on to their market share of approximately 10 per cent each. Similarly, the generic Nexium launch was a key trigger for Cipla, which boosted its first quarter results this fiscal, being the sole supplier to Teva, which launched the generic for Nexium. We expect some benefits to flow in the second quarter as well. More interestingly, Dr Reddy received approval for generic Nexium, which is the only product approval for the company so far in this fiscal. Though there are already four generic players in the market, the launch is an interesting one as the market is worth billions of dollars. The key thing to watch will be further approvals for generic Nexium, as companies like Lupin and Torrent Pharma are in the queue.

The big daddy of the sector, Sun Pharma, however, has not been the favoured stock of late because of compliance issues at its largest FDA-approved plant at Halol in Gujarat. It can adversely affect the company's revenues. The company has been taking steps to resolve the crisis. One-time expenses related to the Ranbaxy acquisition has been affecting the profits. The company has its hopes pinned on interesting launches lined up for 2016, including generic Gleevec and generic Glumetza. FDA approvals for them remain the key, which will depend on the resolution of the Halol plant issues.

Lupin has been in news this fiscal for acquisitions. It has acquired four companies, with the largest one being Gavis Pharma, bought for $880mn. It is the largest acquisition ever by Lupin. With this, the company gets access to the dermatology market, controlled substance market and a few speciality products of Gavis.

Lupin has indicated that it is preparing for a few more acquisitions. Acquisitions play a very important role in the pharma space as organic growth lingers once companies near the threshold level of around $1bn in US markets. Adding newer pipelines, large baskets for better bargaining power and access to various niche markets become important. Organically growing in these areas becomes a lengthy process given the ever-expanding approval timeline of the FDA. Lupin has been late to catch the trend compared with its peers like Sun and Dr Reddy’s.

Lupin has also been in the news following reports of a sharp 200 per cent price increase of an anti-diabetic drug, the generic Fortamet. Lupin has a 60 per cent market share with only one generic competitor, Actavis. A similar molecule drug, Glumetza, which does not have any generic competition as of now, also saw a massive 800 per cent price rise. Glumetza has a $200mn market in the US and Lupin is the only generic company set to enter it next February.

Apart from interesting products like generic Fortamet and generic Glumetza, Lupin also awaits launches of key products such as generic Nexium OTC 28 (an oral contraceptive), Renvela, Renagel and generic Welchol. After Dr Reddy’s got approval for generic Nexium, Lupin, too, fancies its chances.

Lupin’s stock has seen a sharp rise of over 15 per cent recently. The stock also made new high at 2,128 on October 1. Hence on the valuations front, the stock trades at approximately 26x FY17E earnings and leaves little room for PE (price earning ratio) expansion. However, the interesting launches and newer acquisitions will drive the price going ahead.

Lupin has been our preferred pick in the pharma space and we remain confident on Lupin as a long-term investment opportunity given its robust product pipeline for the US in the next three to four years, attractive return ratios, enhancing focus on the complex generics and steady growth in domestic formulations.

The writer is associate vice president, private client group research, Kotak Securities. Views expressed are personal.

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