Home >Markets >Mark To Market >Recall of metformin formulations in the US by Lupin may hit profitability

Lupin Ltd’s announcement recalling metformin extended-release formulation for type 2 diabetes is a bit of a dampener for the company. But its stock has not seen much of an impact. After a marginal dip in the last five days, Lupin’s shares were flat on Thursday. The recall, though, may be quite costly. Not only will Lupin lose sales in the near term, but the cost of a retail recall will also be substantial.

Sales of generics Fortamet and Glumetza, the extended-release formulations marketed in the US, were about $25-40 million in FY20, said analysts. That is quite substantial, constituting about 3-5% of its FY20 revenues. In fact, analysts had been expecting substantial sales from the products in FY21 as well, but that may now be curtailed.

“Potential recall-related disruption presents a risk of $25mn and $15mn to our FY21 and FY22 sales estimates, which might translate to a downside risk of $10mn and $4mn to FY21 and FY22 earnings estimates respectively," said Nomura India analysts in a note to clients.

Besides, consumer-level recalls, being costly exercises, could further slash profitability. While this depends on the extent of recall from consumers, analysts are factoring in about a $10 million additional one-time cost.

While Lupin said it expects to re-launch the products soon, there could still be an impact as it could lose market share. Competition in the US is quite stiff with several manufacturers in the metformin play. Some other Indian companies have already inched up on the bourses, expecting a jump in sales.

Of course, much will depend on how soon Lupin can re-launch products in the US. Generic Glumetza sales continue to be steady in the US and that could help Lupin regain some lost ground, say analysts. However, sales of Fortamet in the US have been declining.

Another worry is whether this recall triggers US FDA regulatory action. Such recalls in the past have had a huge impact. Most notable is the case with impurities found in a compound family known as sartans that proved costly for Indian companies. It also triggered warning letters for some Indian plants. At the moment, Lupin has about five plants under US FDA regulatory action with warning letters or official action-indicated status. It also seems like a re-inspection could be delayed due to the covid-19 pandemic.

Of course, Lupin’s new launches of some of its products from other plants are not going to be affected. Nevertheless, the recent increase in investor sentiment for pharma stocks seems to have over-priced Lupin’s earnings expectations. The stock’s price-earnings multiple of 37 times earnings for FY20 is not quite comforting.

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