We expect Lupin to sustain growth momentum well into FY2015, driven by US launches (Niaspan, Yaz, Yasmin scale-up, etc.), along with double-digit growth in other businesses– India, Japan, RoW (rest of world). This, along with Suprax drop form optionality (therapeutic substitution), drive our OW (overwieght) rating.
What are the key catalysts: We look for Niaspan launch by Mar’13 (with low competition dynamics for a few months), Yaz approval, Renagel (potentially in Q3FY14) and performance of Suprax drops during the upcoming flu season (especially prospects for therapeutic substitution) to drive the stock. Q3Fy14 should be sequentially better due to India recovery, US anti-biotic seasonality, Zymaxid upside and potential Yasmin market share gains.
Longer-term value drivers: In addition to its current focus on niche therapies–OCs (oral contraceptives), ophthals and derms–in the US, the company is investing in new areas like respiratory care, complex injectables and controlled substance. Plus, it is developing its own 505(b)(2)-based drugs (at least three years to launch). Japan may be interesting with roughly $15bn in drugs losing patent protection over the next five years, which Lupin expects to represent.
In-line Q2 results: Sales, operating profit and net profit were up 16%, 27.8% and 39.8% year-on-year, respectively, vs. our expectations of 11.2%, 19%, and 33.9%. Sales growth was driven by all geographies–India, US, RoW. Margins were better due to translation gains (Japan) and better revenue mix. Near-term challenges include high base of US business in H2FY13, which could make the (y-o-y) growth challenging for the balance of FY14. Upcoming price cuts in Japan in April’14 (as part of two years price reset) and I’Rom contract business decline.
Our price target increase is driven by 3.7% increase in our FY15e and a 1.6% lift in our FY2016e earnings per share as well as rolling forward our target EPS by six months to Sept’15 (vs. Mar’15 earlier). Our target P/E (price-to-earnigns) multiple is 22x (unchanged).
Model changes: We have increased our FY15 and FY16 EPS forecasts by 3.7% and 1.6%, respectively, largely driven by increase in our forex assumption to R58/$ for FY15 and FY16 (vs. R56/$ and R57/$, respectively, earlier).
Valuation: The stock trades at 24.7x (times) and 19.7x our FY14 and FY15 EPS estimates, respectively, broadly in line with large-cap peers. We now arrive at a price target of R1,072 (from R973).