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Lupin’s gSpiriva approval: Good addition, but factored into valuations

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Lupin on Wednesday announced US FDA approval for gSpiriva Handihaler, a respiratory product with innovator sales of $1.2 billion in the US last year. For FY24, Lupin should be able to generate $70-100 million (₹500-800 crore) from the product, assuming 50-per cent price erosion and gradual increase in market share. Lupin will be the first generic manufacturer of the complex product and should have limited competition for the next one year, making it a highly valuable addition. Approval of gSpiriva was central to Lupin in reviving the US revenue growth and improving its overall margin profile. Hence, the stock inched up over 5 per cent on Wednesday owing to the positive sentiment.

However, the news is largely factored into the estimates. Lupin is currently trading at 33/23 times FY24/FY25 earnings, after factoring in 470 bps and 200 bps improvement in EBITDA margins in the next two years and a 12 per cent revenue CAGR. We believe the stock faces execution risks at the current level, but this is offset by the strong scope for revival from a low base of revenue/margins.

Weakened base across segments

In FY18-23, Lupin reported flat revenue growth and a decline of 800 bps in the EBITDA margin to 11 per cent by FY23. In the same period, large-cap Indian pharma peers reported 10 per cent revenue CAGR and 630-bp EBITDA margin expansion to 24 per cent. Even in FY23, India sales reported 1 per cent growth, as competition in diabetes impacted sales along with a high Covid base in FY22. The US segment reported 6 per cent decline in FY23 owing to high price erosion for its generic US portfolio despite noteworthy launches in the US, including gAlbuterol and gSuprep. Overall, EBITDA margin was impacted by lower sales base, higher operating costs and higher investment into R&D. On such a weakened base, Lupin guided for low double-digit growth and EBITDA margin improvement to 15 per cent by FY24. gSpiriva along with other measures were cited as drivers for improvement.

Revival measures

In India, the company will add 1,000 medical representatives to drive sales (though late to the strategy) on a base weakened by Covid disruption and loss of sales in diabetes in FY23.

The US strategy is based on inhalation, injectables and biosimilars, of which a few have been launched (including just announced gSpiriva) and will ramp up in FY24. gDarunavir, gDiazepam gel are expected to boost sales in the US along with expected launches of gVarenicline and gNascobal before the year-end. All the generics are limited competition products (smaller scale compared to gSpiriva) with high value potential. In biosimilars, Lupin has launched Enbrel and expecting the launch of Peg filgrastim in the US this year. There are other assets in the pipeline including biosimilar to Lucentis in the advanced stages.

On the cost front, Lupin has reported completing ₹300 crore of cost savings out of a target of ₹500 crore. It is also rationalising its US portfolio for weak margin products and its R&D spend towards New Chemical Entities. The company also faced a high penalty of $26 million from failure to supply in the US and avoiding the same should add to margin improvement measures. Recently, Indian companies have reported softening of US price erosion to single digits from mid-teens, which should also support margin expansion for Lupin.

The low revenue and EBITDA margin base, visibility of growth drivers and margin improvement measures do support the high growth estimates for Lupin (100 per cent EPS CAGR expected in FY23-FY25). But at the current valuation of 33/23 times FY24/FY25 earnings, the growth seems factored in, considering the tall order of revival and execution risks. Lupin is also facing US FDA plant issues including its key plants in Manideep and Pithampur. Hence, while existing investors can continue to hold the stock, fresh exposures need not be considered at this juncture. In the pharma space, we have recently recommended accumulating Cipla for its growth avenues across India, the US and other regions.



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