LUPIN soars 13% on Wednesday, closes at NEW HIGH; Kotak upgrades the stock to BUY with revised Fair Value of Rs 1180

Kotak Institutional Equities says that Lupin is a buying opportunity for the investors and believes scale-up concerns on albuterol post supply disruptions and Sandoz entry are minor. Apart from albuterol, Lupin has multiple growth drivers in place over the medium term including progress on other inhalation assets, filing of biosimilars in the US and potential resolution of warning letters in 2HFY22. Lupin trades at 9X FY2023E EBITDA. Kotak Upgrades Lupin to BUY with revised Fair Value of Rs 1180.

Kotak expects FY22 to be a crucial year for Lupin’s efforts in the complex generics space. Apart from Proair, Kotak expects progress on multiple products including approval of Fostair (EU) by 1QFY22, potential approval of Dulera (US) in 1HFY22 and litigation/approval progress on Spiriva among respiratory assets. 

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Lupin has also made advancement on the biosimilars front with partner Viatris launching biosimilar Enbrel in multiple EU countries. Filing of pegfilgrastim (US) by 1HCY21 and progress on Lucentis biosimilar (global Phase 3 initiated) will further validate Lupin’s capabilities in the biosimilar space and enhance growth visibility beyond FY2023E. 

Progress on complex injectables (peptide hormones, depots) remains at a nascent stage with meaningful contribution likely only beyond FY2024E. With FDA restarting inspection of overseas facilities, resolution of Goa/Indore units by 2HFY22 are additional triggers for US business. Despite near term weakness in the domestic segment, with US scaling-up, Kotak believes Lupin is well positioned for a strong recovery in margins and return ratios over the next two years.

After a sharp dip in albuterol volumes driven by supply disruption of device components in January, gradual pick up in supplies and market share gains will abate concerns on ramp-up of the product. We do not see material risks from Sandoz’ recent in-licensing of distribution rights for Proventil AG from Kindeva as Sandoz entry does not result in additional competition with Endo exiting the market. While Sandoz’ pursuit of market share could impact pricing marginally, Kotak expects prices to sustain above US$10/device over the medium term. Continued absence of Perrigo and 25-30% share still with brands provides opportunity to gain further market share. Kotak forecast US$90-95mn revenues from Proair in FY2022/23E.

Kotak cut their FY2021-22 EPS estimates by 2-4% to factor in muted domestic growth in near-term and temporary supply disruption impact on albuterol during 4QFY21. Kotak upgrade the stock to BUY with revised Fair Value of Rs 1180