Brokerages Cut Estimates For Lupin On U.S. Price Erosion, Cost Inflation
Here’s what brokerages have to say about Lupin’s fourth-quarter performance.
Analysts cut earnings estimates for Lupin Ltd. as its near-term outlook remains uncertain amid intensified competition in the U.S. base portfolio, lower U.S. sales, rise in operational costs, pending U.S. FDA issues at three plants and subdued margin.
The drugmaker reported a Rs 518-crore after-tax loss in the quarter ended March against a Rs 296-crore consensus profit estimate by analysts. It also reported its lowest-ever margin of 6%.
According to Executive Director and Group Chief Financial Officer Ramesh Swaminathan, underperformance in key markets—the U.S. and India—dragged down the drugmaker’s performance. While Q4 is always a weaker quarter for India, the U.S. market was plagued with drug recalls due to impurities and price erosion in some products, he told BQ Prime in an interview on Thursday.
Lupin’s India sales rose 5% over the year earlier, while the U.S. business fell 5%, leading to an overall revenue growth of 3% during the quarter.
Shares of the company were volatile. The stock gained as much as 1.32% and then lost 1.4%. It was trading 0.27% higher as of 10:30 a.m. on Friday.
Of the 43 analysts tracking the company, 13 each recommend a ‘buy’ and a ‘sell’, and 16 suggest a ‘hold’, according to Bloomberg data. The average of the 12-month consensus price target implies an upside of 18.8%.
Here’s what brokerages have to say about Lupin’s Q4 performance:
Motilal Oswal
Maintains ‘neutral’ with a target price of Rs 590 apiece, implying a downside of 7%.
Lupin delivered lower-than-expected Q4 FY22 performance.
Lower U.S. sales, coupled with lower operating leverage, impacted operating margin adversely during the quarter.
Cuts estimates to factor in intensified competition in the U.S. base portfolio, loss of exclusivity for certain products in the domestic formulation segment, reduced offtake of active pharmaceutical ingredient sales, and considerable rise in operational costs.
Rating considers the subdued growth outlook in focus geographies, cost pressures not abating and unattractive valuation.
Overall profitability would improve from Q2 FY23 onwards with benefits kicking in from cost optimisation efforts and aided by niche launches in H2 FY23.
The U.S. FDA inspection is in progress at partner’s site for gSprivia device (asthma).
Lupin remains confident to launch gSuprep in Q3 FY23.
The company expects overall cost savings of Rs 500 crore from optimisation of network, R&D, plant work force and integrating business planning over medium term.
Management expects India business growth at sub-10% year-on-year in FY23 due to loss of exclusivity of certain products.
Given the steep price erosion in the U.S. and gradual pace of niche launches, we expect 5% U.S. sales CAGR over FY22-24.
Nirmal Bang
Maintains ‘buy’ with a target price of Rs 731 apiece, implying an upside of 15%.
Estimates lowered to account for lower U.S. sales and cost pressures.
Price erosion in the U.S. market and costs related to product recall / Solosec litigation affected Ebitda.
The U.S. business recorded an unexpected decline in sales despite the fourth quarter being traditionally strong for the base business.
Weak demand for acute therapies, owing to a weak flu season, aggravated the decline in U.S. sales run-rate.
Current margins are subnormal. Expects them to normalise around mid teens by FY24, led by monetisation of its pipeline in the U.S. (gSpiriva, gSuprep) and efforts around cost management.
The key levers for cost management include lowering spends on following heads—failure to supply penalties, freight costs and hiving off new chemical entity R&D spend.
Assumes successful approval/launch for gSpiriva and gSuprep in the U.S. market in H2 FY23, which together can add $50-100 million (Rs 380-780 crore) to U.S. revenue in FY23.
After two years of hiatus due to Covid-19, the U.S. FDA inspections have resumed. The company expects Tarapur to be cleared soon. It has submitted its response to the FDA and expects a favourable outcome.
Lupin has executed management changes to ensure resolution at the Somerset facility.
The company is keen on acquisitions in India.
U.S. revenue is expected to remain soft in Q1 FY23 and should see strong growth in Q2 FY23.
ICICI Securities
Maintains ‘reduce’, cuts target price to Rs 576 apiece from Rs 817, implying a downside of 9%.
As per the management, U.S. sales will remain under pressure in near term with improvement post key product launches. (Spiriva in Q4 FY23, Suprep in Q3 FY23 and Pegfilgrastim (cancer) in late H2 FY23).
Expects the company to continue to report healthy growth in India driven by its focus on chronic therapies (around 60% of revenue).
Ebitda margin was dismal due to U.S. price erosion and cost inflation.
Lupin has cautioned that margins will remain subdued in near term and will gradually improve aided by cost rationalisation, key launches in the U.S. and normalisation of elevated costs.
While India would grow healthy, the U.S. is expected to remain under pressure due to price erosion and product rationalisation.
Goa plant’s establishment inspection report provides relief but the U.S. FDA official action initiated/ warning letter on three plants could deter growth in near term.
Cuts estimates to factor in margin pressure and lower U.S. sales.
Near-term outlook remains uncertain considering pending U.S. FDA issues at Indore, Mandideep and Somerset plants, subdued margins, steep price erosion in the U.S., and cost inflation.
Despite the recent correction in the stock price, growth outlook remains uncertain.
Key Upside Risks: Early resolution of the U.S. FDA issues and high-value launches in the U.S.