Lupin: Buy

Investors with a two-three year perspective can buy the stock of drug maker Lupin, now trading at Rs 623. A healthy and visible earnings picture geared to profit from higher super-generics and formulation exports and the company's strengths in the contract research and manufacture model of business, form the foundation of our investment recommendation.

Lupin is well-positioned to deliver strong growth rates over the next two-three years in the domestic and international markets backed by an aggressive acquisitions strategy and a strong pipeline in drug filings.

A good pipeline of new drug assets across four therapy areas and new acquisitions (Kyowa-Japan and pharmaceutical business of Rubamin India), can help scale up earnings over the next few years. At the current market price, the stock trades at about 15 times its estimated earnings for 2007-08, which is a discount to peers.

Business profile

From being a prominent player in low-margin anti-TB market Lupin has, over the years, acquired strength in therapeutic areas such as cardiovascular, cephalosporins and non-steroidal anti-inflammatory drugs (NSAIDs).

The company continues to focus on niche opportunities and new drug delivery platforms in the export market, enabling it to shift to generics, super generics and branded segments. As opposed to simple generics, super generics differs from the original product in formulation or method of delivery.

Lupin has more than seven patent applications pending for novel drug delivery platforms in major areas, which can bolster the super generics business.

About one in five of the company's filings in the US are patent challenges and a third are "super generics" or finished medicines that are hard to formulate. The company has a roster of over 50 drug filings in the US and is gearing up for more in the next six-seven months.

Clearance for these filings will enable Lupin to increase its product portfolio in the US. However, Lupin is also looking to expand further in markets such as Europe, South Africa and Australia, effectively addressing the risk attached to the dollar-rupee volatility.

Lupin has a strong position in antibiotics in the advanced markets and this should start translating into sales and profits from the next two quarters.

This, along with further expansion in high-growth segments such as CNS (brain and spinal cord) and oncology in India, suggest good prospects for domestic sales. .

Products: Lupin's antibiotic Cefdinir, launched in May, has been able to ward off competition and maintain a 14 per cent share in the US market.

Lisinopril tablets, used to treat hypertension, maintained the US market leadership with 34 per cent market share while another antibiotic, Suprax's sales in the US grew 55 per cent over September quarter last year.

Lupin has also launched oral third-generation cephalosporin, Cefpodoxime Proxetil tabs, in France which is expected to do well.

Lupin has a strong innovative pipeline, pursuing a dual approach using customary chemical synthesis and herbal leads to identify drug candidates.

Once some of these new chemical entities reach the proof of concept stage (end of Phase II), they can be out licensed. It has recently received a second tranche of Euro 20 million for sale of additional patents for hypertension drug Perindopril to Laboratoires Servier.

In April, Lupin had received a similar amount for patents of same drug in multiple countries to Servier.

On acquisitions

Lupin's acquisitions may not deliver immediate benefits to earnings, but have the potential to scale up revenues over the next few years.

The recent acquisition of generic company, Kyowa Pharmaceutical, has provided Lupin a foothold in the Japanese market where the Government is encouraging greater use of generics.

Though the current generic market size is around 6 per cent of the total $60 billion market, methodical integration with Kyowa helps it leverage hard-to-acquire skills such as product development and manufacturing, while acquiring access to marketing channels in Japan.

That Lupin is already into a two-year relationship with Kyowa, one of top eight companies in Japan, as a marketing partner will help expedite this process.

The acquisition of Rubamin Laboratories, with multiple manufacturing units in Vadodara, will help Lupin focus on advanced intermediates for active pharmaceutical ingredients under the CRAMS model.

This model can help Lupin position itself as a high-end, complex manufacturing services provider with its front-end marketing presence and thus enable better realisations over the long term.