Lupin's Q4 disappoints on soft India sales, higher tax and interest costs

Analysts remain neutral on the stock given limited growth visibility in US, regulatory and lawsuit overhangs

Lupin’s lower than expected March 2019 quarter (Q4) performance further impacted the already weak sentiment, with the stock shedding 3.2 per cent on Wednesday. Moreover, the Street also remains watchful towards Indian pharma companies facing a lawsuit for alleged collusion and inflating drug prices in the world’s largest pharma market, the USA.

Weak India sales weigh on Q4

It was heartening to see Lupin’s North America sales (40 per cent of revenue) grow 16.1 per cent year-on-year and 22.8 per cent sequentially in Q4, led by contribution from a product launched on exclusivity in the US. However, slower than expected domestic sales growth led to a miss on the revenue front during the quarter.

Domestic sales (29 per cent of revenue) grew 9.1 per cent year-on-year but were down 11.6 per cent sequentially. While the March quarter is seasonally weak for domestic sales, analysts at Motilal Oswal Securities had expected domestic sales to grow by about 16 per cent year-on-year.

Not surprising, overall revenue at Rs 4,326 crore, up 8.7 per cent year-on-year and down 1.2 per cent sequentially, missed consensus analysts’ estimate of Rs 4,437 crore.

In the US, exclusivity on angina treatment drug Renexa generics during Q4 and a few other launches such as those of hypothyroidism drug levothyroxine at the end of the quarter and ramp up in brand Solosec, boosted Lupin’s operating profit margin by 70 basis points year-on-year. Operating profit at Rs 959 crore, was up 12.3 per cent year-on-year. A much higher interest outgo (up 46.2 per cent year-on-year) and tax expenses impacted net profit, which at Rs 287 crore was much lower than Bloomberg consensus estimate of Rs 428 crore.

Concerns remain

Moving forward, while the US market may be seeing some ease in pricing pressure, as evident from December quarter performance, for a sustained and significant growth momentum in the US large product approvals remain key for Lupin. The six month exclusivity on Renexa generics will end soon, after which competition will set. The firm has some larger products lined up such as respiratory treatment generics of Albuterol inhaler and a biosimilar product. However, these are unlikely to be launched before the second half (largely towards end of FY20), say analysts. Ranvir Singh of IDBI Capital says he remains neutral on the stock for now.

Regulatory concerns also continue with Lupin yet to resolve the USFDA’s Warning Letter for its Goa plant and Pithampur Unit-2 (Indore) and Official Action Indicated (OAI) status to its plants at the Somerset in the US and Mandideep Unit-1 in India. It is the resolution of these facilities that can push up product approvals and launches in the US. Analysts hope that the issues do not aggravate and add to the overhangs.

“Lupin continues to grapple with USFDA regulatory hurdles at four manufacturing sites, leading to delay in product approvals,” says Purvi Shah of Sharekhan, who feels the recovery path is likely to be a bit longer than anticipated earlier. Shah has a ‘reduce’ rating on the stock.

The concerns have aggravated further as the company is facing a lawsuit along with six other Indian peers on allegations of drug price fixing in the US. The company says it has demonstrated full commitment to compliance with all laws and ethical business practices. The outcome and timeline of the case, however remains uncertain. Analysts at JM Financial say that while anti-trust investigations can go on for several years until liability is established, conclusive early findings can result in huge downsides for the firms involved. The Indian companies have already faced large challenges in the US on pricing pressure during the last few years and the stiff stance on pricing now can add to their woes in the US now.

Given the overhangs, most analysts including Krishnanath Munde at Reliance Securities have a neutral rating on the stock, which currently trades at 16.6x FY20 earnings estimate.