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Home >Market >Mark-to-market >Lupin’s margins trip on US business

When investors in beaten-down pharmaceutical stocks do get some sleep, their favourite dream will be one where the US Food and Drug Administration gives an all-clear to non-compliant drug manufacturers. Till then, the quarterly results announcements have become a sideshow of sorts.

Take Lupin Ltd. Its sales in the June quarter rose by 40% over a year ago, which was expected as its US business has benefited from the sales of two major products, with US sales rising by 82%. However, US sales declined by 1% sequentially in dollar terms. Two things were at work. When it acquired Gavis Pharmaceuticals Llc in the US, the company took over its inventory at market value in the March quarter. The inventory sales in the June quarter fetched it no return as a result. More importantly, Lupin continued to face pricing pressure in the US market, and also had to cut prices of generic Glumetza, one of the two products mentioned earlier. It did launch three new products during the quarter.

While the decline in sales growth is not drastic, the effect on profitability is pronounced. Lupin’s operating profit margin rose by 3.3 percentage points over a year ago but it declined by 1.8 percentage points sequentially. Investors will pay more attention to the sequential number as the year-ago increase was already factored in.

Its India business saw 5% sales growth over a year ago. Low growth is due to the ban on certain fixed dose combination drugs, more drugs entering the price control list and the impact of a decline in wholesale prices on the price revision for drugs already under price control. Other countries did relatively better.

The company’s profit before tax rose by 46% over a year ago but declined by 1.2% sequentially. A lower tax incidence, due to the shift to the new IND-AS accounting standards, led to a net profit growth of 55.8% and 17.5%, respectively. Those are good earnings growth numbers. However, if the sequential decline in margins continues, that’s a risk to watch for.

Lupin’s share fell 5.03% after its results. Inflated expectations could be one reason. Its ability to launch more products, either from its own facilities or through acquisitions such as Gavis, are key to reviving US sales growth. In the next few quarters, an improvement can perk up sentiment. The management expressed cautious optimism about its affected Goa facility getting a green signal soon. Investors will be hoping they can wake up to that news one day.

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