Lupin has announced that it has granted Salix Pharmaceuticals the exclusive rights for the US, to its bio-adhesive drug delivery technology for use with Rifaximin.

Lupin and Salix have entered into an agreement under which the two companies will collaborate in the development and the commercialization of an extended release product incorporating Rifaximin and utilizing Lupin’s proprietary bio-adhesive technology.

Salix generated $80 million in revenue in CY2008 from Rifaximin. Lupin and Salix have also entered into an exclusive agreement in the US for the supply of the Rifaximin API.

Salix has made a $5 million up-front payment and will make additional regulatory milestone payments to Lupin. In addition, Salix will pay royalties on the net sales of the bio-adhesive Rifaximin product to Lupin.

We believe that this transaction is positive for Lupin, as it re-affirms its R&D efforts. On the valuation front, the stock is trading at 15.3x its FY2010E and at 13.6x its FY2010E earnings.

We recommend an ACCUMULATE on the stock, with a target price of Rs1,290, and reiterate it as one of our top picks in the sector.