Lupin faces regulatory challenges; high costs hit profit margins in Q3

High costs have hit Q3 margins, while multiple one-offs have impacted firm's bottom line

Muted sales in its core markets of India and North America led to poor performance by Lupin in the December quarter. Sales in North America, its biggest market that accounts for 37 per cent of sales was down about 3 per cent. Domestic business, the other key geography, grew 9 per cent year-on-year (YoY).  

Analysts at Motilal Oswal Financial Services were expecting 12 per cent YoY growth in India. Lupin indicated that tender sales from India declined and, adjusted for this, growth stood at 10.6 per cent. On sequential basis, India sales were down 3.4 per cent.

US sales were expected to be in the $190-200 million range in the quarter, helped by higher contributions from thryroid treatment drug levothyroxine. Sales missed this target coming in at $186 million. However, other geographies — such as Asia Pacific, Latin America, and rest of the world — grew about 15-26 per cent. Thus, at Rs 3,716 crore, sales were lower than consensus estimates of Rs 4,278 crore.

The major disappointment was on the margin front. Earnings before interest tax depreciation and amortization (Ebitda) were Rs 522.7 crore, compared to street’s estimate of Rs 706 crore. 

Higher remediation costs pertaining to company’s Somerset plant, uptick in R&D (research and development) spends and higher other selling expenses led to the fall. Operating profit margins came in at 14.1 per cent, compared to 18 per cent estimated by the street.

Lupin’s Q3 net profit was impacted by a number of exceptional items.

In view of changes in the pipeline value of Gavis portfolio, which it acquired, the company decided to take an impairment hit on certain intangible assets, leading to an exceptional loss of Rs 1,580 crore. 

Further, taxes also included additional tax of Rs 294.1 crore on divestment of Japan operations (Kyowa) and deferred tax assets of Rs 405.4 crore. The company reported losses of Rs 868.5 crore from continuing operations.

The company had completed the divestment of its entire stake in Kyowa Pharmaceutical Industry in December 2019. 

The transaction resulted in a pre-tax gain of Rs 1,291.1 crore, which the firm said would lead to significant reduction in leverage and improvement in return ratios. 

Lupin will continue supplies of certain products from its Goa plant as part of its sale agreement for Kyowa.

Moving forward, while the company expects profitability to rebound and hit the 18 per cent level on an annual basis, the street remains watchful as this would require its plants to be cleared. At least five of company’s manufacturing facilities remain under USFDA scanner. 

The growth in US sales is currently dependant mostly on ramping up levothyroxine brand Solosec (amoebic treatment drug).  Progress in approval for respiratory product Albuterol will also be key. However, for a better product approval rate the clearance of its plants remains crucial.

Analysts at ICICI Securities said after the results were announced that resolution of Warning Letters and clearance of Official Action Indicated (OAIs) status on plants could be the near-term overhang along with progress on the margins front. 

Growth in India remains consistent but lumpy for Asia pacific.