Lupin’s US, India engines stall in June quarter
In end-May, Lupin Ltd had prepared investors to expect the worst in financial year 2018. That may have proved useful, as investors reacted lightly to a 41.4% drop in its Ebitda over a year ago. Its shares even gained by 1.6% on Wednesday although they are down 18% from end-May. Ebitda is earnings before interest, tax, depreciation and amortization.
In the June 2017 quarter, Lupin’s sales declined by 12.3% over a year ago and by 8.5% sequentially. Its North America sales suffered the most, as expected, from a fall in prices of a key drug and from a general decline in prices.
Competition ate into the sales of generic Glumetza, a significant contributor to its US business. Lupin had cautioned that further consolidation in the US distribution chain could lead to further across the board price cuts in FY2018, on top of cuts seen in FY2017. That has happened.
Its North America sales declined by 26.8% over a year ago, and by 15.7% sequentially. Its India sales declined due to destocking before the goods and services tax was rolled out. This is even as it offered incentives to maintain stocks. Lupin’s management believes the worst is behind it in both these markets. In the US, it expects prices to stabilize. In India, the sales pickup post-GST has been gradual, but is expected to improve.
Along with sales, profitability suffered as well since the US is also a very profitable market.
Lupin’s Ebitda margin declined by 9.5 percentage points over a year ago, and by 2.1 percentage points over the preceding quarter (after adjusting for a one-time litigation charge that pulled down the March quarter margin).
Lupin’s R&D expenditure increased as a percentage of revenue over a year ago but that is because revenue declined. In absolute terms, R&D spend was actually flat and even declined sequentially. That is understandable as research spending can vary across quarters, and Lupin may be hoping that as sales growth improves, it gets the leeway to spend more. After all, its longer term growth depends on its research pipeline.
What can change the tide for Lupin? A better than expected recovery in India can make a difference as India contributes to a fourth of sales. In the US, getting a green signal from the US Food and Drug Administration over its pending compliance issues, followed by a raft of approvals will be good. If it goes south, it will be bad for the stock. Wednesday’s price reaction may suggest its shares have levelled off, but much depends on whether it crosses these hurdles in the coming quarters.