One has to dig really deep in Lupin Ltd’s Q3 performance in the search for green shoots. The one statement about its US business that kindles some hope is that price erosion is continuing but is beginning to level out.

Its management said leading generic firms are reaching a pain point and may increase prices or exit unviable products. This is consequent to unceasing price cuts extracted by the distribution channel, which has become powerful every year on the back of continuing consolidation. With more consolidation seeming less likely, the hope is that prices will at the minimum stabilize.

Lupin’s US business did not do too badly during the quarter but all eyes were drawn to the 65% decline in its net profit over a year ago and 51% fall sequentially. That was way more than what analysts had estimated and sent its shares plunging by 6% on Tuesday. The company blamed one-off factors. Adverse foreign exchange fluctuation caused a hit of 82crore. In some quarters, this contributes to profit and in others, it causes a loss. This quarter saw both a loss and of a higher quantum. Secondly, a change in the US tax law resulted in a charge of 6 crore, which added to its tax liability.

But this was not all. Lupin’s gross profit—the profit remaining after deducting material cost from sales—declined as a percentage of sales. The decline was seen both over a year ago and sequentially. Since the US business grew sequentially, one would have thought that the margin should also have improved. Apart from the forex loss, part of which reflected here, the company said the mix could have played a role, as India’s contribution rose. But it also said that this gross margin could be considered as a base for now.

A lowered gross margin leaves a lower percentage to meet its other operating expenses. No wonder then that Lupin is tightening its belt, with employee costs declining and other expenses falling over a year ago. However, other expenses rose significantly sequentially, which the company mainly attributed to the forex losses that reflected here. They should, therefore, settle in the forthcoming quarters.

In the near term, Lupin is expecting that new launches in the US market will help it arrest price erosion and grow sales, with the focus on Solosec, a product added to its pipeline after a recent acquisition. In the longer run, investor attention will remain on the company’s ability to resolve the warning letter received for two plants. That will take time and is uncertain.

Lupin’s management said it is refocusing its research expenditure for the US market, giving priority to products where it can be among the top three and not pursue others. That will conserve its research spends, which are already relatively high at 12.2% of sales. That’s a pragmatic approach given the difficult market conditions in the US.

In the near term, Lupin needs the US market to remain stable and for a steady drip of new products from its pipeline that can contribute to higher sales growth. That would then create a robust enough gross profit which can then drive operating profit growth. While one-off factors may have laid low its profits in the third quarter, investors are likely to put expectations on hold and wait and watch how it does in the next few quarters.

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