Lupin has been trying to expand its branded business in the US aggressively through licensing agreements. Its efforts accelerated after entry of generic competition to Antara, a $35-40m brand originally.
We believe deals with Romark (for Anilia) and Onset (for Locoid lotion, announced yesterday) are directionally right, because size of the deals is ideal and strategic fit is evident, IIFL Institutional Equities said a research report.
However, the products will take time to ramp up and contribute significantly to Lupin’s overall numbers. In the meanwhile, decline in Antara revenue and the high base of generic Tricor in FY13 would depress FY14 growth and margins; weaker INR would partially mitigate the impact, though. We raise our FY14/15ii estimates by 6-8% due to INR depreciation. Valuation remains expensive.
Another product in the US branded basket: After Alinia from Romark Labs, Lupin has in-licensed Locoid lotion from Onset Dermatologics. Lupin has been aggressively looking to build its branded franchise after generic competition in Antara hit sales in the last two quarters. Although these licensing deals will help to some extent, material benefit would take time, since these brands are still small (both in the US$15-20m range); we expect revenue decline in the branded business in FY14.
High base of generic Tricor will affect FY14 growth: Entry of competition in the generic Tricor market may erode some part of the high-margin sales in the US; we saw some impact in 1QFY14 due to the entry of Mylan. Margins may come off as well, although INR depreciation would help mitigate some of the impact.
Rich valuations limit upside: Lupin’s shares trade at 25x FY14ii core earnings, at 15-25% premium to peers such as Dr Reddy’s, Cipla and Glenmark. We expect some pressure on valuation as growth may remain weak in the next 2-4 quarters due to the high base of generic Tricor. Our revised target price of Rs854 is 22x FY15ii core earnings plus value of cash and one-offs per share.