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Event update: Lupin (Underperformer) - gRanexa trending better than estimates

Event

gRanexa market dynamics turning out to be significantly more favourable  for Lupin than initially expected

Key highlights

• As per latest Bloomberg data for week ended 26^th April 2019, Lupin’s market share in gRanexa has inched up to 68.6%. Lupin has maintained a market share of 60%+ over the last 6 weeks now.
• Notably, Lupin launched gRanexa (brand sales ~$750m at innovator prices) on Feb 27, 2019. As per the settlement with Gilead, Lupin has ~3m exclusivity lasting through May 27, 2019 (patent expiration date).
• We believe that even though the exclusivity stretches into Q1FY20, Lupin is likely to almost entirely book these revenues in Q4FY19 itself. The gRanexa market will get significantly competitive post patent expiry on May 27.
• Lupin’s current market share is significantly higher than our initial assumption of 50% likely due to the absence of an Authorised Generic. We estimate that that due to lower competition, price erosion will also be lower at 25-30% than our estimate of 40% price erosion.
• We now estimate that Lupin will likely book higher revenues of $80-85m during the 3m exclusivity phase vs our initial estimates of $56m revenues. We est Q4 US sales at $285m vs $256m earlier.
• Accordingly, we upgrade our Q4FY19 / FY19 earnings estimates by 33% / 11% respectively. Our revised Q4FY19 estimates for Rev / EBITDA / PAT are Rs47.4bn /Rs10.8bn / Rs5.3bn.

Valuations & view

While Lupin’s US business has likely bottomed now, post 2 years of significant erosion, the recovery is likely to be gradual barring the gRanexa driven one-off boost in Q4FY19. There is limited visibility on meaningful new generic launches (barring gLevothyroxine and gProair) in the US over the next 4-6 quarters limiting chances of a sharp recovery. While Lupin has begun to increase R&D focus on high-value segments like complex generics, biosimilars and speciality to counter these challenges, it will take time to play out. Given these issues, successful scale-up of Solosec, combined with approval for gProair and biosimilar Enbrel remain key to any meaningful earnings revival even in FY20-21. Given significant FY20-21 earnings sensitivity to a meaningful pickup in Solosec scale-up post a tepid start, along with timely gProair approval backed up with ramp-up, we see limited margin of safety at current valuations (21x FY21E). Recent OAI status on 3 manufacturing units further adds to the US growth challenges. Maintain Underperformer rating with a target price of Rs820.