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MOSL: LUPIN (Buy)-Sequential improvement in US business-margin improvement will be key

lupin: Sequential improvement in US business; margin improvement will be key

(LPC IN, Mkt Cap USD5.7b, CMP INR802, TP INR940, 17% Upside, Buy)

 

• 3QFY18 revenue fell 11% YoY to INR39.8b (est. of INR40b). Gross margin shrunk 600bp YoY (-240bp QoQ) to 65%. EBITDA fell ~22% YoY to INR6.9b (est. of INR8.8b, with the margin contracting ~1,000bp YoY (-430bp QoQ) to ~17.3%. 3QFY18 EBITDA included a forex loss of ~INR821m v/s a gain of INR571m in 2Q and a gain of INR276m in 3QFY17. PAT fell 65% YoY to INR2.2b (est. of INR4.3b)
• US business – recovery expected from 2HCY18: US business sales came in at USD213m v/s USD204m in 2QFY18 and USD316m in 3QFY17. Pricing pressure in the base business was offset by recent launches and pick-up in branded business sales. US branded business grew ~25% YoY in 3Q. LPC plans to launch ~10 products in 4Q, including Tamiflu and Axiron. The company also plans to launch its branded product, Solosec, in 1QFY19.
• Earnings call takeaways: 1) Update on warning letter – hired consultants (Lachman and Parexel) to help with the remediation process; LPC plans to finish remediation work by April/May-18. 2) Metformin market share has settled down (although Nostrum and SUNP are yet to enter the market). 3) Remediation expense in 3QFY18 was not meaningful. 4) R&D expense to stay at ~12-12.2% in FY19E. 5) Levothyroxine approval expected by mid-CY18. 6) Etanercept filing – Japan & EU in 4Q FY18E and the US in FY19E.