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MOSL: LUPIN (Buy)-Price erosion in US and reduced operating leverage drag earnings

Lupin: Price erosion in US and reduced operating leverage drag earnings

(LPC IN, Mkt Cap USD5.4b, CMP INR821, TP INR950, 16% Upside, Buy)

 

• EBITDA margin lowest in past 16 quarters: Lupin’s (LPC) revenue was stable YoY at INR38.6b (est. of INR42.6b). Domestic formulation sales (31% of sales) grew 28% YoY, driving overall sales growth. However, this was largely offset by a 26% YoY decline in US sales (31% of sales). Pricing pressure in key products in the US market and seasonality led to 560bp YoY contraction in the gross margin to 63%. EBITDA margin shrank ~610bp YoY to 13.7% due to a lower gross margin and increased other expenditure. Absolute EBITDA declined ~31% YoY (-26% QoQ) to INR5.3b (est. of INR7.7b). The decline in PAT (-43% YoY to INR2b v/s est. of INR3.4b) was higher than the decline in EBITDA, primarily due to a higher tax rate of 47.2% v/s 27.6% in 1QFY18.
• Other key highlights: (1) Branded sales from the US market were USD12m for the quarter. (2) Solosec brand formulary coverage has reached 68%; guided to reach 80% by end-FY19. (3) LPC has a few ANDAs in pipeline that qualify for competitive generic therapy (CGT), and thus, would be entitled for a 180-day exclusivity post approval. (4) Pricing pressure in base business for the US market remains in high-single-digit. (5) LPC guided for 18-20% EBITDA margin for FY19.