The US was a key contributor to the overall performance on the back of a strong flu season and the Tricor launch for pharma company Lupin, says Nomura Equity Research

Pharmaceutical major Lupin’s market strategy responds to generic opportunities in the US, where it is pursuing niche and limited competition opportunities; the rise in medicine consumption in India; and the potential rise in generic opportunities in Japan. Lupin is the largest Indian company in Japan. These observations have been made by analysts from Nomura Equity Research.

According to Nomura, in the third quarter of FY13, Lupin’s EBITDA was 2% ahead of the brokerage’s estimates. The US was a key contributor to the overall performance on the back of a strong flu season and the Tricor launch. EBITDA margin was 100 basis points (bps) higher than the Nomura estimate and is at a multi-quarter high. Net earnings at Rs3.35 billion came in 12% lower than Nomura’s estimate on a higher tax rate.

Lupin’s management expects to continue to deliver 20%-25% revenue growth with margin expansion, which is higher than Nomura’s current estimate. Nomura believes that US generics can continue to drive an earnings upgrade and compensate for the potential loss of the Antara exclusivity. In India, growth slowed to 14% year-on-year in the reporting quarter. Lupin expects to sustain growth at 18%-19% in future.

For retail investors and fund managers in the Indian stock markets, Nomura has a ‘Buy’ recommendation with a target price of Rs705.

The third quarter performance of Lupin in FY13 was good as it reported sales at Rs24.66 billion. The company’s EBITDA stood at Rs6.04 billion. The EBITDA includes forex loss of Rs610 million on account of cash flow hedge loss and MTM (mark-to-market) translation loss, particularly on inventory in Japan. The company also incurred one-time GDUFA (generic drug user fee amendments) fees of Rs180 million during the quarter. During the quarter, Lupin had withdrawn 16 low potential ANDAs (abbreviated new drug applications). EBITDA margin (ex other operating income) of 23.1% was 100 bps ahead of Nomura’s estimate. Net profit was lower at Rs3.35 billion was 12% lower than estimated, primarily on the higher tax rate.

Key takeaways from the 3QFY13 conference call for Lupin are given below:

1. Strong flu season, Tricor launch drives US performance
2. Antara’s generic competition likely in the near term; the company is putting in place a commercial strategy to hold on to a large market share
3. Even ex-Antara US brand business is highly profitable; the company continues to search for assets in the branded space; Suprax drop approval is a possibility in Q4FY13F
4. Interesting low competition opportunities in the generic space may potentially present upsides
5. India formulation business slows; management expects 18%-19% growth going forward
6. Japan: Making progress towards integration of operations with India; vertical integration remains key

Finally, Nomura estimates that over the next 18 months, 10%-15% of the Japan market volume may be produced from India. Currently, Lupin has approval for three formulations for launch in Japan from its Indian plants.