Lupin's Q4FY19 results (Underperformer) - Ex-gRanexa US sales recovery is key
Q4FY19 result highlights
- Lupin’s revenues were down 1% qoq; up 9% yoy to Rs44.1bn vs est of Rs47.4bn. US sales improved marginally qoq to $245mn (Q3 - $193m) vs est of $285mn. We estimate Lupin booked $50-55m of gRanexa exclusivity sales vs our est of $85m and will likely book the balance $25-30m sales in Q1FY20. India grew9% yoy in line with est.
- Due to lower gRanexa sales, EBITDA stood at Rs7.8bn (+16% qoq) vs est of Rs10.8bn. Margins came at 19.8% (Q3 16.7%; est 22.7%). GMs, came in higher at 67.4% (61.4% in Q3) vs est of 63%. SG&A stood lower at Rs21.3bn (-6.7% qoq) led by a decline in R&D at Rs3.96bn (9.2% of sales).
- Tax rate came in higher at 51% (Q3 32%; est of 30%) led by losses in foreign subsidiaries and investments in US. Reported PAT stood considerably lower at Rs2.9b vs est of Rs 5.3bn.
- Goa/Indore USFDA resolution expected by 1HFY20 vs FY19 end earlier
Key positives: Higher GMs; higher other income
Key negatives: Higher tax rate, Unresolved regulatory action
Impact on financials: We have reduced our FY20 earnings by 6% to account for higher tax rate.
Valuations & view
While Lupin’s US business has likely bottomed post 2 years of significant erosion, the recovery will be gradual barring one-off gRanexa boost in Q4FY19 / Q1FY20. 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 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. 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 valuationss. Recent OAI status on 3 manufacturing units adds to the US challenges. Maintain Underperform rating with target price of Rs779.​
Lupin is a pharmaceutical company. Co. produces, develops, and markets a range of branded and generic formulations and active pharmaceutical ingredients (APIs) in India, the United States, and Japan. Co. offers various formulations for use in the areas of cephalosporin, cardiovascular (CVS), central nervous system (CNS), anti-asthma, anti-tuberculosis, diabetology, dermatology, gastro intestinal, and other therapy segments; and APIs for use in therapeutic areas of antibiotics, anti-tuberculosis, CVS, CNS, analgesics, and anti-gout. Co. also develops and out-licenses its drug delivery technologies and platforms; and creates and develops biosimilars for various therapeutic indications.
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