Report suggests that drug-manufacturer’s R&D investments have offset its gross margins with demanding valuations
Lupin Limited (LPC), founded by late Dr Deshbandhu Gupta, is a transnational pharmaceutical company headquartered in Mumbai. It is strongly research focused, with a program for developing New Chemical Entity (NCE). The company has an up-to-date R&D center in Pune and is one of the world’s largest manufacturers of tuberculosis drugs.
Lupin holds global leadership position in the Anti-TB and Cephalosporins (anti-infectives). The company is a significant player in the cardiovascular, anti-diabetic, respiratory, gastro-intestinal, pediatric, CNS (Central Nervous System) and NSAID (Non-steroidal anti-inflammatory drugs) segments.
The company is the second largest Indian pharmaceutical company by sales. According to IMS Health, Lupin is ranked 4th in the US by prescriptions, having 5.3 per cent market share and is the sixth largest generic pharmaceutical player in Japan. The company is now the fourth largest generics pharmaceutical player by market capitalisation in the world. Lupin’s profitability and return ratios are among the best in the industry.
The company has created a portfolio of more than 400 products pipeline targeting more than half of the US drug market that is USD 200bn, and 60 per cent of the pipeline is in oral solids and liquids.
Lupin’s largest and most important market is the United States with 48 per cent share of global revenues. Its total sales at Rs 17100 crore jumped 24 per cent. The strong performance was led by growth in North America, its largest segment, which benefitted from sales of Glumetza and Fortamet and increased its contribution from 45 per cent to 48 per cent of sales. The company’s generics and branded businesses also registered good growth.
Generic business comprises of 94 per cent of Lupin’s US business. Despite higher pricing pressure due to increased competition and channel consolidation in the US market, the business grew by 34 per cent in 2017. Fiscal’17 included full year sales from Gavis amounting to Rs 11.7 crore.
LPC also benefitted from growth in its Metformin franchise with full year sales for Glumetza, which was launched in Feb 2016 and growth in Fortamet. During the year, LPC launched 18 new products including exclusive generic version of Mibelas 24 Fe (Minastrin 24 Fe).
This business contributes merely 6 per cent to the entire US business of Lupin. During 2017, the business catapulted to flourishing 86 per cent as the pharma major benefitted from the launch of two new products from the Gavis portfolio – Methergine and Methylphenidate, which contributed USD 44mn.
LPC’s base branded business declined to USD 34mn from USD 42mn in 2016 as growth in Anatara brand, 36 per cent was offset by 33 per cent decline in Suprax brand due to generic competition. During the year, the company reorganised its branded business into two segments based on therapeutic focus, with its ‘Pharma’ sales force promoting Antara and Suprax brands and ‘Specialty Hospital’ sales force promoting the Methergine brand.
The major risk to Lupin is its inability to scale up the branded business.
ANDA, NDA and USFDA Approvals
During 2017, Lupin filed 37 Abbreviated New Drug Applications (ANDAs) and one New Drug Application (NDA) in oral, dermatology, ophthalmic and metered dose inhaler areas. The company has received 34 ANDA approvals from USFDA (United States Food and Drug Administration) during the year.
The drug-maker now has total 45 (first to file) FTF ANDAs which include 23 exclusive FTF opportunities.
India contributes 22 per cent to Lupin’s global revenues, which grew 11 per cent during 2017. LPC is the sixth largest player in the Indian market with 3.3 per cent share. Over the last decade, Lupin has established itself as a leading generic player from India.
The company has a chronic: semi‐chronic: acute mix of 55:28:17. Its top five therapies contribute more than 70 per cent to revenue — with cardiology having the largest share of 22 per cent, followed by anti- diabetic with 17 per cent share, anti-infectives and respiratory with 12 per cent share each and lastly by gastro-intestinal with a 8 per cent share. As on FY17, LPC had a field force of 6,650 in India.
Japan is LPC’s third‐largest market, contributing 10 per cent of global revenue. In constant currency terms, it grew to 31 per cent. Unlike most other generic players, Lupin entered the Japan market well before other players and also boasts of significant presence in Japan. It is now among the top 10 generic companies in Japan.
The company introduced eight new generics and four neuro‐psychiatric products in the market. During 2016, Lupin had acquired a portfolio of 21 generic brands from Osaka-based Shionogi & Co. Ltd for 15.4 billion yen (Rs 860 crore), to consolidate its presence in the CNS space.
It also entered into an agreement with Astellas to secure exclusive rights to distribute and promote a CNS specialty product Bipresso XR (extended release tablets of Quetiapine fumarate).
In response to growing demand for generics, Lupin also expanded its manufacturing operations for the Japan market by commissioning a greenfield facility in Totorri. The manufacturing plant has the capacity to make two billion tablets in a year in Japan.
APAC, ex‐Japan and EMEA
Lupin’s Asia Pacific region, excluding Japan, revenues grew by 19 per cent during financial year 2017. Its businesses are flourishing in markets such as in Philippines by 23 per cent, in Australia by 17 per cent and South-East Asia. The company made inroads into new markets like Vietnam, Myanmar, Malaysia and Taiwan whilst continuing to keep an eye on newer markets to assess further growth opportunities.
Soaring R&D drivers: NCE and Biosimilars
Thefinancial year 2017 was characterised by the highest‐ever investment by Lupin in research and development (R&D), catapulted 44 per cent CAGR to 13.2 per cent of revenue compared to 11.3 per cent in 2016. Large proportion of incremental spend was on New Chemical Entity (NCE) and biosimilars, which now make up 19 per cent of overall R&D spend. Investing in NCE has long been a triumph of hope over experience for Indian pharma companies. The capitalised portion of spend has also increased to 21 per cent of total spend.
LPC has a pipeline of 11 NCEs focused on CNS, oncology, immunology, pain and metabolic disorder therapy areas. It has fastened the development of 3 out of 11 NCEs, which have finished phase I; in immunology, endocrine and oncology therapy areas.
The company is also working on its biosimilar pipeline and is doing a phase III global clinical trial for biosimilar of Etanercept and planning to initiate clinics for two more biosimilars in fiscal’18. After launching biosimilars for Filgrastim and Peg‐Filgrastim in India, LPC now aims to seek approval for these products in other markets. In the generic space, LPC is targeting inhalation, complex generics and injectables.
Improved gross margins offset by higher R&D spend
The higher gross margin products, such as Glumetza and Fortamet had benefitted the company by lending a 1.8 per cent increase in its gross margin. However, the reported operating margin was flattish due to higher R&D investment and provision for product litigation for Isabelle in Australia (AUD29.8mn). The company made a provision for liability towards its Australian subsidiary amounting to Rs 155.9 crore, in respect of compensation for patent litigation towards its Isabelle generic launch in Australia
Gavis’ weak performance
Lupin had acquired GAVIS Pharmaceuticals for USD 880million in March 2016. Gavis is a New Jersey-based privately held company specialising in formulation development, manufacturing, packaging, sales, marketing, and distribution of pharmaceuticals products.
Gavis was expected to report revenue of USD 200mn; however its performance has been weak and posted largely flat annual sales at USD 117mn. On account of including Gavis’ assets and for funding the acquisition, depreciation had doubled and the interest cost increased three times. During fiscal’17, the return on capital employed (RoCE) had plummeted to 18 per cent as organic and inorganic investments picked up.
Glumetza and Fortamet cash flows boost financials
Strong operational performance led by Glumetza and Fortamet aided to generate improved operating cash flows (OCF) of Rs 3,960 crore compared to negative cash flows in 2016; thereby reduced net debt to Rs 1,160 crore during the year. Additionally, the working capital also declined to 30 per cent of sales versus 40 per cent in FY16. However, this trend is not expected to sustain in fiscal 2018.
Addition of intangible assets
In addition to the organic capital expenditure, during 2016 Lupin had acquired a portfolio of 21 generic brands from Osaka-based Shionogi & Co. Ltd for 15.4 billion yen (Rs 860 crore).
This coupled with movement of certain Gavis brands which were launched during the year from intangibles under development to intangibles, amounting to Rs 300 crore and certain other licensing agreements for other Rest of the world (RoW) markets, which had cumulative amount less than Rs 250 crore, added intangible assets for the company.
Stance of Lupin
Given LPC’s segmental and geographical baskets, Lupin is well-positioned to capture the global generics. The growth driver for the company will be the US generics and would also make up for the weak United States branded business. The growth would be enhanced by the bounce back of businesses in India and Japan. LPC’s cash flows and operating metrics will also allow for inorganic growth and keep premium valuations intact.
During the upcoming years, 2018 and 2019, the growth of the United States business is expected to remain disappointing. This will lead to expected earnings per share CAGR (EPS) of 2 per cent over fiscal 2017-19 and RoCE is expected to decline further to 15.3 per cent in 2019 due to inorganic initiatives and higher capital expenditure.