Lupin stock gains on EIR from USFDA, but not out of the woods yet

Lupin has had a number of positive triggers over the past couple of weeks, both on the product approval and regulatory fronts. While approvals will help it launch its drugs in the US market, clearance for its various units removes a potential overhang. The company received the Establishment Investigation Report (EIR) from the US Food and Drug Administration (USFDA for the successful inspection of its Pithampur, Unit-I, at Indore, carried out last year. The Unit-II of the same plant also received regulatory clearance from the Canadian regulator. In addition to the Pithampur unit, the UK drug regulator has completed inspection of its Goa facility without any observations. 

While these are positive signs, the company still has some work to do before its plants can be declared fully compliant with regulations of various countries. The Goa and Unit-II at Pithampur facility still remain under warning letter as far as the USFDA is concerned. The recent developments, however, indicate some progress on the regulatory front. Not surprising then, that the stock closed three per cent up on Friday and has also recovered more than 11 per cent from 52-week lows seen on March 26, this year.

Further boost to the share price will come from a resolution of warning letters. While observations from the US drug regulator for Goa and Pithampura Unit II are not very serious and analysts expect the resolution to come in 3-4 quarters, the same remains crucial for driving US sales given the pricing pressure. 

With the company’s metformin franchise (diabetes portfolio) under pricing pressure, and high competitive intensity for rest of product range too, new and large product launches remain crucial. Since the two facilities are crucial for exports to the US, the resolution is important for more approvals and launches to maintain US growth momentum and thereby uptick in earnings and its stock price. The company earlier had said that it is in process of completing remediation and plans to invite US FDA for inspections by June 2018. All eyes thereby will be on the same.

In the meanwhile, gradual recovery is also being expected in March quarter performance. Analysts expect some respite during the quarter as compared to the multiple challenges both on pricing and regulatory fronts the company faced over the last 4-5 quarters. Despite the loss of exclusivity in renal treatment generic Fosrenol and metformin franchise share to decline further, analysts at Edelweiss expect US sales ($215million) to remain stable sequentially as the launch of generic Axiron (testosterone medication) and generic Ancobon (anti-fungal) are expected to offset the pressures on other drugs. Credit Suisse, too, expects Lupin’s US sales to benefit from generic Tamiflu capsules and suspension (flu treatment), Axiron launch, ramp-up of Azithromycin (antibiotic), etc though they expect operating performance to still decline sequentially due to higher R&D costs, which are typical in the last quarter. Near-term risk as per Credit Suisse is the generic launch in post partum hemorrhage drug Methergine.