Institutional Equities

Lupin
26 November 2019

Reuters: LUPN.NS; Bloomberg: LPC IN

High Value launches on the horizon – Execution is key ACCUMULATE

Lupin, which was founded in 1968 by Shri Desh Bandhu Gupta, is currently the fifth largest Sector: Pharmaceuticals
company in Indian Pharmaceutical Market and fourth largest by prescription volume in the
US. We initiate coverage on Lupin with an Accumulate rating and a target price of CMP: Rs781
Rs824 based on 20x FY22E earnings. FY20 base earnings (ex Ranexa) stand at around Rs 21
per share. The key elements that would help the earnings build up would be Target Price: Rs824
Initiating Coverage

1) ProAir launch – We estimate this to be a US$50mn opportunity for Lupin. The key assumption Upside: 6%
being 20% market share at 50% price erosion and 20% volume expansion led by cannibalization of
Ventolin market share, which is yet to go off patent. ProAir appears to have better attributes thanVishal Manchanda
other Albuterol inhalers on the market which should support market expansion post genericisation Research Analyst
2) Enbrel biosimilar – Lupin would be 3rd entrant in the Europe Enbrel biosimilar market, which is vishal.manchanda@nirmalbang.com
currently about US$1.5bn in size. We expect grabbing market share would be a challenge as it would +91 9737437148
require sales force effort and competing against already entrenched players like Biogen Idec and
Sandoz. We expect Lupin to garner a 7% market share and assume 20-30% price erosion by FY22. Gaurang Sakare
Research Associate
3) Solosec ramp up – All fixed costs related to Solosec are currently in the cost structure and all
incremental sales that would emerge will almost entirely flow down to operating profit as the cost of gaurang.sakare@nirmalbang.com
sales will be a low single digit percentage number. We anticipate Solosec to garner about US$30mn +9122 6273 8093
in peak sales by FY22, which should imply about US$15mn addition to operating profit.
Key Data
4) Levothyroxine ramp up – By the end of FY20, Lupin would have commercialized the expanded
Current Shares O/S (mn) 452.7
capacity for Levothyroxine and it now has an AB rated approval against all major RLD’s (Synthroid,
Unithroid and Levoxyl). We believe Lupin may be able to garner around 20% market share in the Mkt Cap (Rsbn/US$bn) 353.9/4.9
Levothyroxine market, which should translate to a peak sales opportunity of US$100mn 52 Wk H / L (Rs) 906/646
6) Chronic heavy portfolio and aggressive in-licensing strategy to help Lupin outpace IPM – Daily Vol. (3M NSE Avg.) 1,531,279
Lupin continues to leverage its chronic presence for in-licensing deals in opportune growth markets
Lupin generates about 10% of its domestic sales from in licensed molecule. The market for in-
licensed molecule is worth Rs6,000 crore and growing in mid to high teens, while Lupin portfolio of in- Share holding (%) 4QFY19 1QFY20 2QFY20
licensed molecule is growing faster (about 60%). Lupin remains the preferred partner for in-licensing Promoter 47.0 47.0 47.0
deals in opportune markets like cardio diabetes by virtue of its leadership position.
Public 53.0 53.0 53.0
7) Key Macro Trends are favouring an upturn Others - - -
1) Companies have now less price erosion to fight with on their base portfolio in the US
2) Indian players can ramp up volumes in US as foreign generic peers prune their portfolio One-Year Indexed Stock Performance
3) Manufacturing investments continue to decline which should help pricing in the medium term 120
4) Indian markets offer volume and price led growth.
110
5) IPM should grow high single digit to low teens
100
6) Opening up of China Pharma market for India generic players allows India players to leverage
their US approved portfolio for margin expansion 90

80
Y/E March (Rsmn) FY18 FY19 FY20E FY21E FY22E
70
Net sales 158,042 167,182 172,450 212,250 190,491 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19
EBITDA 31,475 28,822 30,429 70,421 39,467 LUPIN LTD Nifty 50

Net profit 33,879 15,995 12,636 36,571 20,581

EPS (Rs) 5.6 13.4 23.0 76.2 41.2 Price Performance (%)
Adjusted EPS 25.0 17.9 23.0 27.2 41.2
1M 6M 1 Yr
EPS growth (%) (55.9) (28.3) 28.2 18.4 51.6
EBITDA margin (%) 19.9 17.2 17.6 33.2 20.7 Lupin 6.5 2.4 (7.5)
P/E (x) 30.5 43.4 34.0 28.7 19.0 Nifty Index 4.2 1.9 13.6
P/BV (x) 2.5 2.6 2.4 2.0 1.8 Source: Bloomberg
EV/EBITDA (x) 12.7 14.7 13.7 5.5 9.6
RoCE (%) 10.3 9.4 9.1 23.1 10.6
RoE (%) 25.0 11.6 8.7 20.7 10.7
Source: Company, Nirmal Bang Institutional Equities Research
 Institutional Equities
Levothyroxine market opportunity (Indication – Hypothyroidism)
The market opportunity is close to US$1,700mn (at manufacturer price), which is split between brands
(Synthroid, Levoxyl, Unithroid and Tirosint) and generics. As on date, we estimate brands have a market
share of 17% by volume, while generics have a market share of 83%. The branded Levothyroxine (primarily
Synthroid) market by value is approximately US$900mn, while generic market by value is US$750mn.

Synthroid: Synthroid is the most prescribed brand with more than 90% market share (among brands) and
has annual sales of US$800mn.

Generic Levothyroxine: The market for generic products is approximately US$750mn annually and these
comprise 83% of the market prescription volume.

Exhibit 1: Market share – gLevothyroxine

(%)
60%

50%
39.4%
40%
31.6%
30%
22.8%
20%

10%
4.5%
0% 1.5%
Sep-14

Sep-15

Sep-16

Sep-18

Sep-19
Sep-17
Jan-15

Jan-17

Jan-18

Jan-19
Jan-16
May-15

May-16

May-17

May-18

May-19
Amneal Pharma Lannett Lupin Mylan Sandoz Alvogen
Source: Bloomberg, Nirmal Bang Institutional Equities Research

What’s unique about Levothyroxine?

Levothyroxine is narrow therapeutic index drug, which means small variations in dosages can make the drug
toxic. Hence, the USFDA has stringent approval criteria. The USFDA has approved several brand names for
Levothyroxine which include Tirosint, Levo-T, Levothroid, Levoxyl, Synthroid and Unithroid. Levothyroxine is
required by law to fall within 5% of its stated potency and the USFDA requires that this potency falls
within 95% to 105% (as measured in an assay).

Exhibit 2: Approved brands of Levothyroxine on the market

Market Proprietary Dosage
TE Code Applicant Holder Approval Date
Status Name Form
Rx Euthyrox Tablet AB2 Provell Pharmaceuticals Llc May 31,2002
Rx Levo-t Tablet AB1,AB2,AB3 Cediprof Inc Mar 1, 2002
King Pharmaceuticals Research And
Rx Levoxyl Tablet AB1,AB3 May 25,2001
Development Llc
Rx Synthroid Tablet AB1,AB2 Abbvie Inc Jul 24, 2002
Rx Thyro-tabs Tablet AB2,AB4 Alvogen Group Holdings 4 Llc Oct 24, 2002
Rx Unithroid Tablet AB1,AB2,AB3 Jerome Stevens Pharmaceuticals Inc Aug 21, 2000
Discn Levolet Tablet - Genus Life Sciences Inc Jun 6, 2003
Rx Tirosint Capsule - Institut Biochimique SA (Ibsa) Aug 1, 2007
Source: USFDA, Nirmal Bang Institutional Equities Research

2 Lupin
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Exhibit 3: Current therapeutic equivalence ratings
Referenced Products Unithroid Synthroid Levoxyl Levothroid
(Therapeutic Equivalency) (AB1) (AB2) (AB3) (AB4)
Unithroid - AB2 AB3 BX
Synthroid AB1 BX BX
Levoxyl AB1 BX - BX
Levothroid (Thyro-Tabs) BX BX BX -
Mylan LT4 AB1 AB2 AB3 AB4
Lupin BX AB2 BX BX
Sandoz LT4 (Levo-T) AB1 AB2 AB3 BX
Merck GKAA LT4 BX AB2 AB3 BX
Source: USFDA, Nirmal Bang Institutional Equities Research

Exhibit 4: Synthroid is the largest brand in Levothyroxine market

Synthroid US Sales Trend
2018 2019
Drug
Q1 Q2 Q3 Q4 Q1 Q2
Synthroid (US$mn) 182 193 192 209 182 202
% Growth (5.3) 0.1 0.7 2.00 0.30 4.90
Source: Company, Nirmal Bang Institutional Equities Research

Lupin - gLevothyroxine (AB rated for Synthroid, Unithroid and Levoxyl)

LPC has received approval for all 12 strengths of Levothyroxine tablets, referenced to Synthroid (CY2017
sales: US$780mn) and in the recent past it has also received bioequivalence status for Unithroid and Levoxyl.
The opportunity size is large, but unlike other generics it will be a gradual scale up. The volume requirement is
huge as it represents 5.8bn tablet market. The early ramp-up has been gradual so far, but the same should
accelerate now as the company has received approval against all major Levothyroxine RLD’s, which should
allow larger acceptance among formularies.

3 Lupin
 Institutional Equities
Solosec: A challenging market – benefits not very compelling and unique
Expect US$30mn - US$40mn in peak sales as we do not see once-a-week convenience as a meaningful
benefit in case of acute conditions like bacterial vaginosis. On dosing convenience Solosec is not very
different from Tinidazole, which is to be taken two times in a week. Tinidazole when launched did about
US$50mn in peak sales. Currently, Tinidazole is available as a generic.
Solosec does not require patients to abstain from Alcohol; however the benefit is not unique
Most agents that are prescribed for treatment (metronidazole) of bacterial vaginosis require patients to abstain
from alcohol. However, there is no such restriction that is required while consuming Solosec. We believe the
benefit of not being required to abstain from alcohol is not unique as patients can choose Clindamycin (which
is available generically).
Ramp up in Solosec continues – In the most recent week, Solosec prescription has reached 2500 levels,
which essentially indicate an annual run-rate close to US$15mn. The ramp-up continues to trend favorably
and there is a sequential improvement.
Exhibit 5: Solosec prescription trend
Units
3,000

2,500

2,000

1,500

1,000

500

0
Aug-18
Sep-18

Aug-19
Sep-19
Jun-18

Jan-19

Jun-19
Jul-18

Jul-19
May-18

May-19
Feb-19
Mar-19
Apr-18

Apr-19
Oct-18

Oct-19
Dec-18
Nov-18

Solosec
Source: Bloomberg, Nirmal Bang Institutional Equities Research

Formulary coverage of Solosec - primarily Tier-3 coverage

Tier-3 coverage essentially means that there are alternatives to Solosec, which are essentially priced lower
and offer similar benefit. A tier-3 coverage would also imply higher co-pays for patients. Lupin offers a co-pay
assistance program to ensure reluctance on part of patients to afford the co-pay does not impact prescriptions
growth.
Ongoing clinical studies on Solosec will help further penetration and prescription growth
Lupin is conducting a Phase 3, multi-center, prospective, randomized, placebo-controlled, delayed treatment,
double-blind, study to evaluate the effectiveness and safety of a single, oral dose of Solosec® containing 2
grams of secnidazole in female patients with trichomoniasis. The study will report data in March 2020 and has
enrolled 144 patients.

4 Lupin
 Institutional Equities
Exhibit 6: Solosec has unrestricted access to 73% of commercial lives in all locations

Source: formularylookup.com, Nirmal Bang Institutional Equities Research

5 Lupin
 Institutional Equities
gProAir can be a sticky opportunity: approval hurdles remain high
• ProAir is a metered dose inhaler (MDI) containing Albuterol as active substance. It is a US$400mn brand in
the US. Over 70mn units of Albuterol sulphate is dispensed each year in the US.
• Albuterol inhalers are indicated for the treatment or prevention of bronchospasm with reversible obstructive
pulmonary disease. Reversible obstructive pulmonary disease includes asthma, exercise-induced
bronchospasm (EIB) and chronic obstructive pulmonary disorder (COPD).
• Albuterol inhaler market has seen a 30% price correction in the last 3 years. ProAir has lost prescription
share to Ventolin. Both ProAir and Ventolin have taken price cut of 30% over last few years.
• In the Albuterol inhaler category, approximately 40% of prescriptions are written as “generic Albuterol”. We
are not sure whether an Albuterol generic prescription can be replaced with either of three Albuterol
inhalers – Ventolin, Proair or Proventil or their respective generic versions. From a bioequivalence
perspective all the 3 inhalers – Ventolin, ProAir and Proventil are not interchangeable (See: Exhibit 9).
• Given the current scenario it is likely that ProAir will be a 4 player market (innovator, authorized generic,
Perrigo and Lupin). In addition to direct competition from ProAir generics, Lupin will also see
competition from generic version of Proventil, which will be launched around the same time as Lupin by
Cipla.
• We expect a 50% price erosion and 20% market share, which should translate into US$40mn in sales
for Lupin. Therapeutic substitution gains from Ventolin market will be incremental and can add about
US$10mn.
• gProAir will mean a sticky opportunity

Exhibit 7: Albuterol MDI inhaler market trend – volume

(Units in mn)
60.0

50.0

40.0

30.0

20.0

10.0

0.0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Proair Ventolin Proventil Albuterol Inhaler Market

Source: Bloomberg, Nirmal Bang Institutional Equities Research

Exhibit 8: Albuterol MDI inhaler market trend – value (US$ mn)

(US$mn)
1,400
1,200
1,000
800
600
400
200
0
2010 2011 2012 2013 2014 2015 2016 2017 2018
ProAir Ventolin Proventil Total Albuterol Mkt
Source: Bloomberg, Nirmal Bang Institutional Equities Research

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 Institutional Equities
Exhibit 9: ProAir, Ventolin, Proventil are not Interchangeable
ProAir Ventolin Proventil
Total Dose delivered per inhalation 90 ug 90 ug 90ug
Fine Particle**Dose Delivered
64 21 40
per inhalation (with VHC)
Expiration Time 24 months 12 months 24 months
Dose Counter (When introduced) Yes (2012) Yes Yes –Recently in 2018
Source: Company, Nirmal Bang Institutional Equities Research

Dose of Albuterol sulphate likely to reach the lungs with Proventil or ProAir is 2 to 3 times that of Ventolin. As
such, patients with asthma may require 3 additional puffs of Ventolin to achieve a clinical benefit similar to
Proventil or ProAir. Because all 3 products contain 200 actuations, it also follows that Proventil or ProAir
products may last a user 2 to 3 times longer than Ventolin.

Exhibit 10: ProAir – Most efficient among Albuterol inhalers – without VHC

Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 11: ProAir – Most efficient among Albuterol inhalers – with VHC

Source: Company, Nirmal Bang Institutional Equities Research

7 Lupin
 Institutional Equities
Enbrel biosimilar opportunity – commercialization challenges
 Lupin has a partnership with Yoshindo / Nichi-Iko for Japanese market and Mylan for EU market
 Lupin is the second player in Japan to get an approval for Enbrel biosimilar. We estimate the Japan
market for Enbrel to be US$200mn
 Biosimilar market trend in Japan so far is not encouraging – slow uptake has been seen for
biosimilars that target chronic markets
European approval is due in 4QFY20 or early 1QFY21 – Enbrel in Europe is a US$1.5bn market
Lupin / Mylan would be the 3rd biosimilar entrant in Europe after Sandoz and Biogen Idec. There are currently
two biosimilar players in Europe. Etanercept market size has corrected 30% from pre biosimilar entry levels.
We believe price corrections in Etanercept market have been steeper as part of market decline has been
offset by volume increase. Over 2018 to 2019, Benepali market share in volume terms is up 25%, but value
sales have remained flat, which indicates volume expansion has just taken care of value erosion in the last 1
year.
Exhibit 12: Etanercept revenue
(US$mn) 2015 2016 2017 2018 2019
Enbrel 2,150 1,852 1,410 1,152 844*
Benepali - 101 371 485 485
Elrezi - - - 70* 110*
Total 2,150 1,953 1,781 1,707 1,454
Growth (%) - -9% -9% -4% -15%
Source: Company, Nirmal Bang Institutional Equities Research;
Note: *Estimated number

Incumbents are raising the bar for new entrants through a portfolio approach and evidence from
switching studies
Sandoz and Biogen Idec are established players in the anti TNF space. Biogen launched biosimilar Enbrel in
2016, while Sandoz launched in 2017. Biogen Idec has been able to capitalize on its first mover advantage
with a greater than 40% market share now in the Enbrel market. In order to drive the early launch advantage
further, Sandoz has executed switching studies on its biosimilar version – Elrezi and has demonstrated
equivalence.
NaMuscla approval in Europe - a difficult market to tap
NaMuscla® is approved across the European Union (EU) for the symptomatic treatment of myotonia in adults
with non-dystrophic myotonic (NDM) disorders. These disorders are a group of rare, inherited neuromuscular
conditions in which myotonia, the inability to relax muscles following voluntary contraction, is the most
prominent clinical symptom.
NaMuscla is priced at approximately GBP 60,000 as annual cost of treatment at retail price and has been
launched in the UK, Germany and France. The prevalence of non dystrophic myotonic disorder is less than 1
in 100,000 population. Based on the prevalence rate, the affected population in the UK, Germany and France
would be around 800 patients. Assuming 20% of patients are treated, NaMuscla can reach sales of
US$10mn by FY22.

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 Institutional Equities
US business highlights
Exhibit 13: US Business Revenue growth
(Rsmn) (%)
90,000 82,626.0 50
80,000 40
67,536.0
70,000 59,253.0 39.4 62,480.0 30
56,576.0 59,127.2 57,274.0
60,000 55,925.0 20
50,988.3
50,000 10
11.0 9.1 8.1
40,000 0
4.7 2.4
30,000 -10
-5.4
20,000 -20
10,000 -30
-28.4
0 -40
FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
North America Growth (%)

Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 14: US TRx count

(mn Units)
250 234

195 202
200 185 189

150 129

100

50

-
FY14 FY15 FY16 FY17 FY18 FY19
US TRx Count

Source: Bloomberg, Nirmal Bang Institutional Equities Research

Exhibit 15: US revenue per prescription

(USD)
7.0
6.2 6.2
6.0
4.8 4.7
5.0
4.4
4.0
3.3
3.0

2.0

1.0

-
FY14 FY15 FY16 FY17 FY18 FY19
US Revenue per Prescription

Source: Bloomberg, Nirmal Bang Institutional Equities Research

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 Institutional Equities
Regulatory Status
Exhibit 16: Regulatory status of the Facilities of Lupin
Firm Name Facility Type Facility Action
Lupin Limited API and Formulation Unit-1 Mandideep OAI
Lupin Limited Formulation Verna, Salcette,Goa OAI
Lupin Limited Formulation Unit-2 Pithampur OAI
Lupin Limited Formulation Somerset OAI
Source: USFDA, Company, Nirmal Bang Institutional Equities Research

10 Lupin
 Institutional Equities
India business
Exhibit 17: India business mix

13.00
23.00
4.00

8.00

4.00
0.00
15.00
0.00
8.00

15.00 10.00

Cardiac Anti-Diabetic Respiratory Anti-Infective

Gastrointestinal Pain Vitamins CNS
Anti-TB Gynaecology Others

Source: Company, Nirmal Bang Institutional Equities Research

 Lupin’s India business is consistently setting notable performance milestones in the Indian
Pharmaceutical Market (IPM). For the year ended 31st March 2019, Lupin’s domestic formulations
generated a turnover of Rs46,382mn, up 12% over FY18 with a five-year CAGR of 13%. There were
disruptions in FY18 - namely GST, demonetization, ban on fixed dose combinations because of which
growth came down a little bit. But, in the past one year, the company’s India business has rebounded
with double digit growth.
 India continues to be the second largest business unit for Lupin, contributing 29% to the topline in FY19.
Lupin has maintained its 5th position in the IPM, growing fastest among the top 5 companies and
consistently outperforming the IPM. The market share of Lupin improved from 3.46% in FY17 to 3.54% in
FY18 and 3.63% in FY19.
 Lupin maintains the 4th position in the high growth chronic segment, growing faster than IPM. The
chronic segment has improved the salience to 60% of the India revenue and the acute segment
contributes 40%. In the chronic therapeutic areas, the top three, anti-diabetic, respiratory and cardiac are
also the company’s top three therapeutic areas. Lupin is number 2 in respiratory, number 3 in diabetes as
well as cardiology. These three therapeutic areas account for 55% of India revenue.
 The company has iterated positive stance on growth prospects of the IPM and expects growth of 10% in
the next 3-5 years. The government in India has come up with multiple measures like Jan Aushadhi and
try to get more generic utilization to bring access to low cost medicine. But, there is not a material shift in
the share of the branded generic segment and it is still close to 95% and management doesn’t expect the
trend to change anytime soon.

11 Lupin
 Institutional Equities
Exhibit 18: India business mix trend
(%)
100%
6.00 5.00 4.90
13.00 13.00 4.00 4.00 4.00
90% 20.00 5.00 4.20
4.00 4.00 6.00
4.00 4.20
80% 4.00 4.60
8.00 8.00 5.00 5.00 5.00
5.00 4.90
4.00 4.00 6.00 4.00
70% 7.60
8.00 8.00 8.00 8.00
8.00
60% 10.40
14.00 9.00 12.00 12.00
15.00
50% 12.80
13.00 12.00 12.00
10.00 11.00
40%

30% 15.00 16.00 16.00 17.00 19.00 20.80

20%

10% 23.00 22.00 23.00 22.00 21.00 21.70

0%
FY14 FY15 FY16 FY17 FY18 FY19

Cardiac Anti-Diabetic Respiratory Anti-Infective Gastrointestinal Pain Vitamins CNS Anti-TB Gynaecology Others

Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 19: India business revenue growth

(Rsmn) (%)
70,000 25
61,910
60,000 19.7 56,282
51,166 20
50,000 46,383
15.1 40,455
38,157 15
40,000 34,151
29,679 10.0 10.0
14.7 10.3
30,000 24,795 10
11.7
20,000
5
10,000 6.0

0 0
FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
India Business Growth (%)

Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 20: India business revenue growth breakdown

(%)

100%
4.00 2.00 3.00
80%

60%
5.00 5.00 4.00
5.00
40%

20% 6.00 4.00

3.00
2.00
0%
(2.00)
-20%
FY16 FY17 FY18 FY19

Volume New Products Price

Source: Company, Nirmal Bang Institutional Equities Research

12 Lupin
 Institutional Equities
Key Macro Trends favour an uptrend in the Sector
Exhibit 21: Base Business Erosion on a steady decline

Source: Lupin, Nirmal Bang Institutional Equities Research

Exhibit 22: Foreign generic players continue to exit the market in big way

Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 23: Investment in manufacturing capacity is at an all time low. Capex is just covering depreciation
(%)
7 6.4

5
4.3 4.0
4 3.3
3 3.3 2.3

2 1.4 1.2
1.6 0.7
1 1.7
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
CapEX as a percentage of Depreciation
Source: Company, Nirmal Bang Institutional Equities Research

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Declining capex aggravated by manufacturing site closures/divestment
Teva has announced plans to reduce manufacturing facilities to half in the long term. Out of the 80
manufacturing facilities, it has already reduced 7 and would divest/close another 11 this year.
 Amneal post its merger with Impax also continues to realign its manufacturing footprint.
 Having been able to find no buyers, Lannett has announced closure of its manufacturing facility in the
US. Lannett also laid off 50 employees at one of its API manufacturing facilities.
 Pfizer announced closure of its two generic manufacturing facilities in India at Aurangabad and Chennai,
which together employs 1700 people.
 Hikma announced closure of its Eatontown (New Jersey) facility that manufactured oral solids for the US
markets.
 Post Mylan – Upjohn merger closure, we might get to hear more from them on manufacturing sites.

Exhibit 24: Exit of foreign generic players is leading to shortages in oral solid dosages. In 2019, 61%
of the new shortages were on account of oral drugs

Source: Company, Nirmal Bang Institutional Equities Research

China offers a new avenue for Indian pharma players to deploy their US approved manufacturing
assets
1) Indian players have begun to file drugs for approvals in China under their new QCE framework.
Incremental investment for filing of these portfolio products is likely to be significantly lower as Indian
players need to leverage their existing efforts in the US. Under the new QCE approval framework, we
will see opportunity emerging from two large segments of China pharma market
2) Upcoming patent expiries in China
3) Grab a share of the MNC sales pie which is currently worth $20bn
4) Incrementally we might see exit of large players in China as they might not qualify for approval under the
new framework, which should leave open an opportunity for Indian players – Indian players can choose
to supply considering relative benefits they get in China over US market.
5) We expect Indian players to exercise caution while building fresh capacities for catering to the China
market based on their learning from the US and Europe experience.

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 Institutional Equities
Exhibit 25: Indian Pharma Market can sustain high single digit to low teens growth

Source: Company, Nirmal Bang Institutional Equities Research

The NLEM 2015 has roughly 376 medicines and medical devices which is subject to revision in 2020
Key reforms that are expected
 Antibiotics which are witnessing resistance may be brought out of DPCO
 Drugs priced under Rs. 5 per dose may be brought out of DPCO
 We might see a more exhaustive NLEM list, but mechanism of price regulation may be varied
 Certain drugs under DPCO, may be linked to their API price

Biosimilars represent a large Opportunity but Challenges to market persist

1) Biosimilars being not interchangeable as small molecules, gaining market share is a challenge especially in chronic
segments
2) Huge upfront investments are required for filing and approval, which doesn’t fit into most generic players capital
allocation strategy
3) First mover advantage remains crucial for generating enhanced RoIs
4) Innovators are looking to cling on to the product post patent expiry too, which makes it difficult for geneircs to make
meaningful inroads.
5) Emerging markets represent a very large avenue for players to generate meaningful volume expansion, but return
on investment dynamics restrict the amount of discounting that can be done on a biosimilar vis-a-vis small
molecule.
6) Life Cycle Management - Innovators look to shift market to alternative formulations to lower impact of biosimilar
entry

Exhibit 26: Biosimilars losing Exclusivity

Source: Company, Nirmal Bang Institutional Equities Research

15 Lupin
 Institutional Equities
Valuation
We value Lupin at 20x FY22E EPS and arrive at a target price of Rs824. The key assumptions in our
forecasts being the US business will exhibit a higher growth trend on the back of stabilizing base business,
incremental business from key big launches such as gProAir and ramp-up of Solosec and Levothyroxine.
European business is also expected to perform better on the back of launch of biosimilar Etanercept, Fostair
inhaler and orphan drug Namuscula. The Indian business is expected to grow faster than IPM due to
improving business mix. Rest of the business will grow at single digits.

Exhibit 27: Historical price/earnings ratio of Lupin

(x)
55
50
45
40
35
30
25
20
15
10
Aug-15

Aug-16

Aug-17

Aug-19
Aug-18
May-17

May-18

May-19
May-15

May-16
Feb-16

Feb-17

Feb-18
Feb-15

Feb-19
Nov-14

Nov-17

Nov-18

Nov-19
Nov-15

Nov-16

P/E 5 yr mean +1 SD -1 SD +2 SD -2 SD

Source: Bloomberg, Nirmal Bang Institutional Equities Research

Risks to our recommendation

1) Regulatory compliance remains the key risk. Warning letters and OAIs remain key issues to be
resolved. The company has indicated that it is ready for re-inspection of Goa and Somerset facility by
March 2020.
2) Exchange rate – Depreciation/appreciation of USD versus INR can have an adverse/favorable impact
on earnings versus our forecasts. For an adverse/favorable change in the exchange rate of USD versus
INR by Re1, we estimate the impact on earnings to be about Rs500mn.
3) Execution and commercialization capabilities for new as well as existing products are a key risk.
The successful marketing of key products such as Etanercept and Fostair in the US market is a key part
of revenue growth expected from the US.
4) DPCO risk – The risk of additional drugs coming under price control, which is expected to be
announced next year, is a major risk to the India business of Lupin. The value growth of India business
will largely depend on the extent of price control on drugs marketed by Lupin.

16 Lupin
 Institutional Equities
Ratio charts
Exhibit 28: Revenue and revenue growth Exhibit 29: EBITDA margin
(Rsmn) (%) (%)
22.7 23.1
250,000 25 33.2

190,491
35

172,450
17.1

167,182
20

158,042
200,000 13.1 30 28.3
11.6 15 26.6

212,250
25.9 25.7
112,866

174,943
150,000 5.8 10 23.5
25
5
142,555

0.0 19.9
127,700

100,000 17.6
3.2 0 20 17.2
20.7
(5)
96,413

50,000 15
(10)
(9.7) (10.3)
0 (15) 10
FY17

FY 20E

FY 21E

FY 22E
FY 13

FY 14

FY 15

FY 16

FY 18

FY 19

FY 20E

FY 21E

FY 22E
FY17
FY 13

FY 14

FY 15

FY 18

FY 19
FY 16
Total Revenues Revenue Growth EBITDA margins

Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 30: Current ratio and cash ratio

(x)
3.5 3.2 3.3
2.9 3.0 2.8 2.8
3.0 2.6 2.5
2.5 2.1 2.2

2.0 2.4 2.4

1.9 2.1 2.0 2.0
1.5
1.7 1.7
1.0 1.5
1.3
0.5
0.0
FY17

FY 18

FY 19
FY 13

FY 14

FY 15

FY 16

FY 20E

FY 21E

FY 22E
Current ratio Quick ratio
Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 31: Debt-to-equity ratio

(%)
70 63.8
58.9 59.8
60 50.6 52.5
50
39.8
40 34.1

30
18.7
20
8.0
10 5.3
0
FY 20E

FY 21E

FY 22E
FY17
FY 13

FY 14

FY 16

FY 18
FY 15

FY 19

Debt to Equity Ratio

Source: Company, Nirmal Bang Institutional Equities Research

17 Lupin
 Institutional Equities
Exhibit 32: Cash conversion cycle
(Days)
220
198
200 183 188 186
177 178
180 169

160
140 125 120 121
120
100
80
60

FY 20E

FY 21E

FY 22E
FY17
FY 16

FY 18

FY 19
FY 13

FY 14

FY 15
Cash Conversion Cycle
Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 33: Return on Assets

(%)
18.9 19.0
20
18 15.8
16
12.9
14 11.8
10.3
12 10.2
10
8 5.8 6.4
6 4.5
4
2
0
FY17

FY 20E

FY 21E

FY 22E
FY 13

FY 14

FY 15

FY 16

FY 18

FY 19

RoA
Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 34: Return on Equity

(%)
30 26.5 27.4 27.7
25.0
25
20.8 20.1 20.7
20

15 11.6
10.7
8.7
10

0
FY17

FY 20E

FY 21E

FY 22E
FY 13

FY 15

FY 16

FY 18

FY 19
FY 14

RoE
Source: Company, Nirmal Bang Institutional Equities Research

18 Lupin
 Institutional Equities
Exhibit 35: Return on Capital Employed
(%)
40 36.4 35.6
35 30.1
30
23.1
25
17.6
20 16.3
15 10.3 10.6
9.4 9.1
10
5
0

FY17

FY 20E

FY 21E

FY 22E
FY 13

FY 14

FY 15

FY 16

FY 18

FY 19
RoCE
Source: Company, Nirmal Bang Institutional Equities Research

19 Lupin
 Institutional Equities
Lupin - Overview
Lupin is a leading global pharmaceutical company headquartered in Mumbai (Maharashtra), India. It is the 5th
largest in IPM and 4th largest generic pharmaceutical company in the US by prescription volume. The
company manufactures and sells a wide range of branded and generics formulations, Active Pharmaceutical
Ingredients (APIs), biotechnology products and Over-the-Counter (OTC) products in a variety of dosage forms
and therapeutic categories.. It has over 18 manufacturing units, nine research centres and more than 20,000
professionals working globally. Founded by Dr. Desh Bandhu Gupta (an associate professor of chemistry at
BITS Pilani, Rajasthan) in 1968, Lupin is a significant player in key therapy areas such as cardiovascular,
anti-TB (world leader), anti-asthma, anti-diabetic, anti-infective, gastro-intestinal (GI), central nervous system
(CNS) and gynaecology.

Exhibit 36: Shareholding pattern

Particulars No. of shares (mn) % held
Promoter & promoter group 212.6 46.96
Mutual funds 32.1 7.09
Franklin Templeton 4.7 1.04
Foreign portfolio investors 116.2 25.66
Government Pension Fund Global 8.4 1.86
Financial institutions/banks 26.5 5.85
LIC 10.9 2.42
ICICI Prudential Life 5.3 1.17
Others 64.9 14.33
Rakesh Jhunjhunwala 7.1 1.56
Source: BSE, Nirmal Bang Institutional Equities Research

Exhibit 37: Revenue break-up

1%

7%
4%

7%
38%

17%

26%

North America India APAC (Mainly Japan) EMEA LATAM API Others

Source: Company, Nirmal Bang Institutional Equities Research

20 Lupin
 Institutional Equities
Financials
Exhibit 38: Income statement Exhibit 39: Cash flow
Y/E March (Rsmn) FY18 FY19 FY20E FY21E FY22E Y/E March (Rsmn) FY18 FY19 FY20E FY21E FY22E
Net sales 158,042 167,182 172,450 212,250 190,491 EBIT 7,512 18,250 21,172 59,608 28,610
% growth (9.7) 5.8 3.2 23.1 (10.3) (Inc.)/dec. in working capital 13,172 (20,844) 1,250 620 (3,736)
Raw material costs 52,744 58,458 58,589 61,837 65,922
Cash flow from operations 20,683 (2,594) 22,423 60,228 24,875
Staff costs 28,647 31,513 34,034 30,919 33,393
Interest Income and Other Misc
R&D expenses 18,516 15,731 16,227 15,734 17,015 (17,324) (7,394) (1,813) (1,244) (1,898)
Items
Other expenditure 26,659 32,658 33,172 33,338 34,694 Depreciation 10,859 10,850 11,144 12,131 12,829
Total expenditure 126,566 138,360 142,022 141,829 151,024 Tax paid (-) (2,885) (9,017) (8,499) (22,999) (7,992)
EBITDA 31,475 28,822 30,429 70,421 39,467
Net cash from operations 11,333 (8,154) 23,255 48,116 27,814
% growth (29.9) (8.4) 5.6 131.4 (44.0)
Capital expenditure (-) (8,801) (8,512) (11,670) (15,115) (16,101)
EBITDA margin (%) 19.9 17.2 17.6 33.2 20.7
Other income 1,504 3,640 1,850 1,281 1,936 Net cash after capex 2,532 (16,666) 11,585 33,002 11,713
Interest costs 2,044 3,078 2,286 2,110 1,972 Other Investing activities 5,319 1,014 1,850 1,281 1,936
Gross profit 105,298 108,724 113,862 150,412 124,569 Cash from Financial Activities (765) 11,443 (11,103) (10,759) (9,357)
% growth (15.7) 3.3 4.7 32.1 (17.2) Opening cash 6,994 14,080 9,872 12,204 35,728
Depreciation 10,859 10,850 11,144 12,131 12,829 Closing cash 14,080 9,872 12,204 35,728 40,019
Profit before tax 36,763 25,012 21,135 59,571 28,573 Change in cash 7,086 (4,209) 2,332 23,524 4,291
% growth (40.0) (2.3) (2.2) 181.9 (52.0)
Tax 2,885 9,017 8,499 22,999 7,992 Source: Company, Nirmal Bang Institutional Equities Research
Effective tax rate (%) 13 42 40 39 28
PAT before Minority Interest 33,879 15,995 12,636 36,571 20,581
Share of JV 35 38 38 38 38 Exhibit 41: Key ratios
Share of MI and Associates 106 89 0 0 0 19
Y/E March FY18 FY19 FY20E FY21E FY22E
PAT after Minority Interest 34,020 16,122 12,673 36,609 20,619
Profitability & return ratios
% growth 25.1 (52.8) (21.0) 189.4 (43.7)
EPS (Rs) 5.6 13.4 23.0 76.2 41.2 EBITDA margin (%) 19.9 17.2 17.6 33.2 20.7
Adjusted EPS 25.0 17.9 23.0 27.2 41.2 EBIT margin (%) 14.0 12.9 12.3 28.1 15.0
% growth (55.9) (28.3) 28.2 18.4 51.6 Net profit margin (%) 21.4 9.6 7.3 17.2 10.8

Source: Company, Nirmal Bang Institutional Equities Research RoE (%) 25.0 11.6 8.7 20.7 10.7
RoCE (%) 10.3 9.4 9.1 23.1 10.6
Exhibit 40: Balance sheet
Working capital & liquidity ratios
Y/E March (Rsmn) FY18 FY19 FY20E FY21E FY22E Receivables (days) 110 113 109 88 99
Equity 904 905 905 905 905 Inventory (days) 253 234 249 250 246
Reserves 134,866 136,517 144,157 175,907 191,806
Payables (days) 179 159 160 160 159
Net worth 135,771 137,422 145,062 176,812 192,711
Current ratio (x) 2.5 2.8 2.8 3.2 3.3
Minority Interest 401 469 469 469 469
Net deferred tax liabilities 3,716 3,325 3,325 3,325 3,325 Quick ratio (x) 1.7 2.0 2.0 2.4 2.4
Total Loans 68,763 82,219 76,187 70,325 65,725 Valuation ratios
Other Long Term Liabilities 5,221 7,273 7,273 7,273 7,273 EV/sales (x) 2.5 2.5 2.4 1.8 2.0
Liabilities 213,871 230,709 232,316 258,204 269,503 EV/EBITDA (x) 12.7 14.7 13.7 5.5 9.6
Net Block 49,074 49,115 62,938 68,951 75,253 P/E (x) 30.5 43.4 34.0 28.7 19.0
CWIP 9,563 10,186 9,810 10,790 11,770 P/BV (x) 2.5 2.6 2.4 2.0 1.8
Intangible Assets and Goodwill 54,546 61,752 49,487 45,478 41,468
Intangible assets under dev 16,419 6,211 5,555 5,555 5,555 Source: Company, Nirmal Bang Institutional Equities Research
Other Non Current Assets 11,097 12,134 12,134 12,134 12,134
Non-Current Investments 267 1,856 1,856 1,856 1,856
Inventories 36,625 38,368 41,518 43,286 45,486
Debtors 51,922 51,498 51,816 50,700 52,935
Cash 14,080 9,872 12,204 35,728 40,019
Other current assets 19,374 38,501 35,143 35,333 36,471
Total current assets 122,001 138,239 140,681 165,047 174,912
Creditors 25,791 25,005 26,365 27,827 29,665
Other current liabilities 23,392 23,781 23,781 23,781 23,781
Total current liabilities 49,183 48,785 50,145 51,607 53,446
Net current assets 72,819 89,454 90,535 113,440 121,466
Total assets 213,785 230,709 232,316 258,204 269,503
Assets Held For Sale 86 0 0 0 0
Source: Company, Nirmal Bang Institutional Equities Research

21 Lupin
 Institutional Equities
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22 Lupin
 Institutional Equities
Disclaimer
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BUY > 15%
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23 Lupin