Lupin: Multi-year growth story!

Lupin is India’s fifth largest drug-maker and has one of the best return ratios in the industry with ROE of 35% and ROCE around 28%. It provides growth visibility for the next 3 years . The company is also making all the right moves whether its acquisition, hedging, product launches and use of capital. Its acquisition strategy is based on geographical presence and margin improvement through back-ending of production. After Ranbaxy, Lupin is the only other Indian company present in Japan (world’s 2nd largest market). Its hedges around 35% of its total exposure through forward contracts rather than through exotic instruments. Product strategy is to launch niche and differentiated products with a focus on Para IVs and FTFs. There is also efficient usage of capital through working capital optimisation.

Growth in the future will come from the following areas:

FY11:  Company acquisitions in Latin America and GCC. Branded generic products acquisitions (Antara and Allernaze)

FY12:  Generic version of GSK’s Combivir and Forest’s Namenda (FTF), Biosimilars, Oral Contraceptives (Only 2 players present currently) and Milestone payment ($40-45mn) from Salix if the extended release product of Rifaximin progresses well during trials. Margins improves due to back-ending of production, capex might decrease by 150crs over FY11 and tax rate goes up by 2-3% due to possibility of sunset clause not being extended.

FY13:  Launch of generic version of Schering Plough’s Clarinex, Fortamet (exclusive FTF),  Novartis’s Lotrel, Royalty and API sales from Salix’s Xifaxan.

Developed countries focus on containing healthcare costs should benefit generic players like Lupin. All these should result in earnings growing by atleast 25% over the next 3 years. Risk remains of very high competition once product is out of the exclusive sales period.

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