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Lupin launched 19 new products in FY14, including generic versions of Zymaxid (antibiotic, October 2013), Trizivir (antiviral) and Cymbalta (anti depressant, December 2013) and in current fiscal, company plans to launch another 20+ products. Although Cymbalta pricing has descended largely to generic levels and Niaspan, launched in Q4 FY14, would see additional competition, we believe latter would be large enough opportunity to boost US growth in the current year. Other products like Doxycycline (anti-infective, March 2014) and Yaz (under launch process in the oral contraceptive portfolio) would also support growth. Lupin’s pending ANDAs imply an addressable opportunity of over US$80bn of which 30 are first-to-file (FTF) addressing a market size of ~US$14bn; it also has 15 exclusive FTF addressing a market size of US$1.5bn.
Overall we believe company’s existing US portfolio remains robust and growth would accrue from either price increases or additional market share gains. The recent consolidation in US distribution channels would have a mixed impact as in some cases the sheer scale of buying customers might entail price concessions while in others Lupin can gain additional volumes.
Chronic therapies to drive domestic formulations growth
India formulation business has recorded a robust 17% cagr over the last five years and the company is amongst the fastest growing players in high growth therapy segments like
Cardiology (23% revenue share), Anti-Diabetics (15%), Anti-Asthma (10%), Central Nervous System (CNS), Gynecology, Anti-Infective and Gastro-Intestinal (8%). The company has shifted from a dependence on acute therapies to the higher margin chronic therapy segments like CVS, CNS, anti-asthma etc which now account for 64% of domestic formulations’ revenues. In Q1 the momentum continued with revenue growth of 29% yoy compared to 9% yoy growth for the industry. We believe Lupin is well positioned to grow its relatively low market share of 2.8% (as of March 2014) supported by a portfolio of 21 brands with sales in excess of `300mn each. Company has launched 23 in-licensed products in the past four years of which 9 were first to be introduced in the domestic market.
Japan: large opportunity but steady revenues in near term
Japan is the 3rd most important market accounting for 10.4% of revenues after US and India. Japan generics offer a vast opportunity from both higher generics penetration (govt target of 60% vs current 44%) and patent expiries. Higher penetration would translates in to an additional 30-35% of the pharma volumes open to generics in the next 4 years while patent expiries of key molecules to the tune of US$17bn by 2017 would also add to the growth pool. I’rom (niche injectable player acquired in FY12 and 25% of Japan revenues) sales declined 4% yoy in Q1 (-6% yoy for FY14) due to fall in out-licensing business and company indicated in its
Kyowa, its other subsidiary, grew by JPY 14% in FY14 with a portfolio of 350 products. Although margins in Japanese business are below overall corporate level but company expect to sustain them. We factor in ~7-11% INR growth driven by Kyowa over the next 2-3 years. Lupin represents the best bet to play the robust growth in US generics expected over the next 2-3 years driven by new launches in FY14 and large opportunity size linked to pending ANDA approvals. Domestic formulations business with growth in high teens would easily outpace the industry supported by increasing share of chronic therapies and rise in market share. Margin profile would undergo a transformation from 23.5% in FY13 to >28% by FY17 with sustainable range seen at 28-30% according to the management. We forecast
19% EPS cagr over FY14-17 driven by 17% revenue cagr and ~160bps margin expansion and recommend BUY.