Differentiating To Grow - Lupin

Differentiate or die is the mantra that companies are applying to carve their niche in the market they are operating. Lupin, a mid-size Indian pharmaceutical company, had been following the mantra to mark its presence in the global pharmaceutical market. When the company like Teva (world's largest generic player by revenue) is trying to differentiate itself through its scale, Lupin is trying to gain a better foothold in the market by exploiting the niche and difficult to produce, IPR driven opportunities like launch of Ramipril in US and Perindopril in Europe.  Even the stock market is applauding its mantra which got reflected in its performance on the bourses. During the last calendar year, when BSE Health Care, representing broader health care sector, saw its value declining by 49 per cent, Lupin fell marginally by one per cent.

Business Segment
Lupin, which started its business in 1968 and was predominantly into sales of API (Active Pharmaceutical Ingredient). For FY08 the formulation contributed 70 per cent of the total sales and API shared remaining 30 per cent. CRAMS (Contract Research and Manufacturing Services) forms part of the API and has very small turnover this year. Going forward API will contribute less and less because most of the production will be diverted towards internal consumption for manufacturing of formulations. For FY09 it is expected that API will contribute 25 per cent of the total revenue.[PAGE BREAK]

The company entered into CRAMS business by acquiring Rubamin Laboratories, rechristened as Novodigm. "Sustainability of the CRAMS depends upon CSS (Custom Chemical Synthesis) we do for our partner where we are very dominant and offer lot of values to our innovating companies. We would be partnering them for research work, development of molecules and taking it to various phases of clinical development. This would be the part of our entire CRAMS strategy", says S. Ramesh, President-Finance and Planning.  Lupin is working with couple of innovator companies to develop new CSS, where the margin is relatively high compared to simple manufacturing of drugs. This will help the company to play in the entire value chain of CRAMS and lock in into relationship with innovator companies at the very early stage of product lifecycle and become their strategic partner. By 2010 it is expected that the CSS market will be around USD 4.5 billion. Unlike other major Indian pharma companies, Lupin has not spun off its new chemical entity (NCE) business which has remained part of company. It has four investigational new drugs in the pipeline at various stages, focusing in disease areas of migrane, psoriasis and tuberculosis.

Global Strategy
In FY08 Lupin earned 55 per cent of the total sales from export and is expected to touch 60 per cent this year. This will help the company to report better margins as the export market has better margins than the domestic market. The company is adopting multiple strategies, i.e. organic, partnership and acquisition, in order to grow. "Proposition should be attractive from various points of view like therapy area, technology platform, geography etc. for adoption of appropriate strategy", says Ramesh. Under the organic strategy the company submits proposals to various authorities like US FDA, Ministry of Health, Labour and Welfare, Japan, NHS in UK to get its drug approval. The company has filed 69 ANDAs (Abbreviated New Drug Application) with US FDA and expects to get approvals close to 10 to12 this year. It has launched 21 products till date in US out of which they are one, two or three in terms of market share close to 17 products and number one in seven of those products. The company launched "Suprax" as a drug for the paediatrics and has generated revenue of USD 37 million in FY08, growing by 50 per cent and is expected to maintain the momentum with the launch of variants like 400mg, double suspension etc.[PAGE BREAK]

The company has formed alliance with Forest Laboratories for promotion and marketing agreement of AeroChamber Plus(R) line of products. Lupin has made some acquisitions during the last year to fill the gap in their global presence in terms of therapy, geography etc. In October 2007 it acquired 79 per cent stake at the Kyowa Pharmaceutical Industry, one of the top generic companies in Japan. The total pharmaceutical market of Japan is of USD 65 billion and generic penetration is as low as 5-6 per cent by value. This presents huge opportunity to Lupin. In September 2008 the company took major stake of a South African generic company, Pharma Dynamics, which has been rated as the fastest growing generic company in South Africa over the last five years. It marked its presence in Australia by establishing a wholly-owned subsidiary and filing 16 dossiers of generic product, market size of which is about AD 850 mn. In Germany Lupin acquired generic sales and marketing company Hormosan Pharma Gmbh which specializes in the supply of products for the central nervous system (CNS).

Performance and Valuation
Lupin has been consistently paying dividend for the last ten years. This year it paid dividend of 100 per cent and at the current market price the dividend yield comes close to two per cent. Lupin's return on net worth of 36.38 per cent in FY08 is one of the best in industry. In the last five years the company's topline compounded annual growth rate (CAGR) at 22 per cent and bottomline for the same time period grew by 47 per cent. The same momentum was not maintained in H1FY09, where the topline increased by just 12 per cent from Rs 1340.7 crore (H1FY08) to Rs 1500.42 crore (H1FY09). Profit for the same time period increased by 22 per cent. But going forward the company will contain the sales volatility by moving towards chronic therapy drugs like anti-asthma, cardiovascular etc. where the price volatility is lower than acute therapy. At the current market price of Rs 570 the scrip is trading at 9.61 times of its last twelve month trailing earnings. When we compare it with broader market index, Sensex, which is trading at 12 times, we find it cheaply priced. Even if we compare PE of this major Indian pharmaceutical company, which is trading at double digit, we find it attractive. Market capitalization to sales of the company of 1.70 times is lowest among its peers. EV/EBIDTA for the company for FY08 of 8.9 times looks very cheap looking at the type of growth the company is demonstrating. Company had issued FCCB (Foreign Currency Convertible Bonds) worth USD 100 million in year 2006, out of which 28 per cent has been already converted. Since the price of shares is quoting above conversion price of Rs 567 we feel that it will be converted into shares that will lead to increase in number of shares by 7 per cent. Going forward we hope the company's differentiated strategy will work and its recent acquisition and partnership will help keep its momentum. We feel the company will maintain its long-term growth rate and will improve the bottomline growth rate due to saving on raw material price (due to fall in crude oil prices), interest rate and on tax (due to opening up of manufacturing facilities at tax-exempt zones and EOUs). Therefore, we recommend our readers to invest in the counter with potential upside of 25 per cent in next twelve months.