Lupin’s FY18 health chart flags risks to growth
Drug maker Lupin Ltd’s December quarter results are reason for optimism tinged with caution. Sales growth trends are looking good, especially in the crucial US market, which makes up 45% of formulation sales. Other markets did well and profitability is up too.
President Donald Trump wants lower drug prices in the US. Billionaire investor Rakesh Jhunjunwala asked Lupin, on a conference call, how it could get affected. As of now, it’s not a worry was the company’s response. Lengthening drug approval times in the US are a more immediate worry. More competition in some key products is another concern for the drug maker.
The real surprise in the company’s numbers was the sharp jump in profitability, with its Ebitda (earnings before interest, tax, depreciation and amortization) rising by 43.7% from a year ago. Its Ebitda margin rose by around three percentage points, with a similar gain sequentially.
Healthy sales growth of 26.4% over a year ago meant that the drug maker’s operating costs were spread over a higher base. Growth was good across markets, with the US market growing by 57.6% and by 8.9% sequentially.
Sales from products such as generic Glumetza, a diabetes drug, and ramp-up in sales of Methergine, a drug to treat postpartum haemorrhage, and sales from smaller products all contributed to growth. Lupin faced some competition in generic Fortamet, a drug to treat diabetes.
Other regions did well too (see chart), with India growing despite demonetization and Lupin expects sales to revert to normal levels next quarter onwards.
On a sequential basis, however, the company’s gross margin was a tad lower as sales increased by 4.6% but costs rose by 4.7%. Still, a slower increase in employee costs and a decline in margins boosted profitability. Also, research and development costs as a percentage of sales declined while favourable foreign exchange effects in the December quarter also helped.
Lupin’s profit rose by 20.5%, as depreciation and interest costs rose sharply but other income increased as well. Net profit declined by 25.7% sequentially, chiefly due to a sharp increase in its tax incidence this quarter. Taxes can be lumpy across quarters. The company said it expects its effective tax rate to be at 28% and profitability to sustain at current levels.
The company is expecting that US market growth will continue to benefit from an improving flow of launches, including from the Gavis acquisition. A ramp-up in sales in the controlled substances portfolio is also expected. More competition in generic Glumetza and Fortamet in fiscal year 2018 are risks that will play out.
Lupin also has a large pipeline of products, and getting final approvals to launch should also be good for growth. Not getting them likewise will pull down growth. The company remains on the lookout for acquisitions, stating that it has cash to repay debt but wants to hold spare cash for any buyouts.
Jhunjunwala, who holds a 1.8% stake in Lupin, asked the management about the risks of drug price controls in the US. The management said this will affect innovator firms and not generic companies. The new government’s emphasis on faster approvals may actually benefit generic companies, it said.
But there is a risk. Any erosion in the value of the innovator drug’s market size reduces the potential market for a generic too.
Lupin’s shares are down by a fifth from a year ago and trade at 20 times FY18 estimated earnings per share, based on the mean of estimates compiled by Reuters.