The Global Fund, a public-private partnership to fight acquired immune deficiency syndrome (AIDS), malaria and tuberculosis (TB), is facing funding constraints.
The Global Fund provides grants to countries inflicted by diseases such as TB, AIDS and malaria, from the money received from donor countries. Countries inflicted by these diseases include India as well as various countries in Africa and Asia.
The fund is facing a budget deficit of $5 billion, as only $3 billion from its budgeted expenditure of $8 billion in FY2010 has been received so far.
As per the data exhibited on the Global Fund website, the fund has approved grants of $560 million to India, of which only $300 million has been released till date.
This would reduce the financial aid given to the government in its healthcare-related expenditure (specifically towards AIDS, TB and malaria).
Indian generic drug companies, such as Ranbaxy Laboratories, Cipla, Aurobindo Pharmaceuticals and Lupin are suppliers of anti-TB, anti-malarial and anti-HIV medicines to health programmes in India and in Africa, financed by the Global Fund.
With a drop in the funds released by the Global Fund to its recipient countries, the businesses of these companies may feel some heat.
Drop in earnings
Lupin derives less than 10% of its overall sales from the Global Fund business. Being a government procurement scheme, the margins on this business are wafer thin. As per our estimate, the Global Fund must be contributing ~2-3% of Lupin’s net profit.
Assuming a 50% reduction in the procurement made by the fund (in line with the reduction in the funds released to India), this could lead to a 1.0-1.5% reduction in Lupin’s FY2010 earnings.
With sustained growth momentum in the domestic market, strong visibility of earnings from the US business owing to sizeable product opportunities and the ramp-up of business in Europe, Japan, Australia and the other markets, we expect the company to deliver a strong performance over the next few years.
At the current market price of Rs604, Lupin is discounting its FY2009E earnings by 11.7x and its FY2010E earnings by 9.9x.
Keeping in mind the strong business fundamentals and the growth potential of the company, we reiterate our BUY recommendation on Lupin with a price target of Rs840.