This pharma bluechip is springing back to life. Is it worth your consideration?

To a long-term Lupin investor, turbulence is all too familiar. A glance at its financial accounts would reveal the many challenges it has faced over the last decade, including but not limited to losses, write-offs and litigations.

However, the generic drug maker (off-patent drugs) is restoring its health. In the latest financial year (FY24), its operating profit grew over three times and the company clocked an operating profit margin of 13 per cent, highest since FY18.

The market has also rewarded the change in fortunes. Lupin's share price, which had been on a losing streak since 2015, has turned around recently, growing a whopping 2x in the past 12 months (closing price as of May 14, 2024).

But, before delving into what Lupin is doing differently, we first bring you a rundown of its tumultuous past. Will its recent progress last long? More on that later.

The big bets that failed

Up until 2015, Lupin was among the fastest-growing pharma companies in the domestic market. During FY11-FY16, its revenue and profit after tax grew 19 and 21 per cent per annum, respectively.

In the US, it was the fifth-largest by drug prescriptions. To keep up the pace, the management followed organic and inorganic growth routes. The company set up three new production facilities and made two acquisitions in FY16. The deals cost Lupin $880 million, making them the largest pharma acquisitions ever made by an Indian company. The total capex Lupin incurred the same year was worth Rs 5,500 crore. Of this, Rs 2000 crore were sourced from its cash balances and the rest was raised via debt. As a result, its debt-to-equity ratio that was below 0.1 jumped sharply to 0.65. While Lupin derived benefits from these investments for a while, clocking its highest-ever operating profit in FY17, the glory didn't last.

Since both its acquisitions were engaged in manufacturing opioid drugs, the backlash against opioid-based painkillers in the US caught up to Lupin around 2018-2019. The company saw a severe revenue decline with heavy impairment charges over the next few years. It also found itself in the midst of multiple legal challenges. These setbacks led to an exceptional loss (on impairment of assets) of nearly Rs 2,500 crore between FY18-FY20, deteriorating its profitability. It further reported a net loss of Rs 1,528 crore in FY22 as it continued to struggle in the wake of the pandemic due to price erosion in the US generic market.

Solid comeback in FY24

So, how did the recent strength come about? It was set in motion in FY21 when Lupin turned to the respiratory segment, where it already had strong expertise and was only behind market leader Cipla. During the year, the company introduced its first-ever inhaler in the US and gained a market share of close to 20 per cent within the first year of the launch, thanks to its vast distribution network. Since then, it has launched multiple non-oral complex generic products including inhalers, injectables, and gels. Complex products generally require a more sophisticated underlying chemistry than a generic. Moreover, the company also upgraded its existing production facilities with large capex, enhancing operational efficiency. The strategy gradually paid off. Its US revenue grew 29 per cent last year (FY24) against five-year average growth of 5.4 per cent . Additionally, almost 80 per cent of the new product revenue came from its non-oral complex product portfolio, which improved profit margins. Even its Europe and African businesses saw punchy double-digit growth since the launch of its star-product (inhaler) in FY23.

Lupin's India business, which made up 33 per cent of its FY24 revenue, has also gained momentum in the last two years. The company added 1,300 new employees to its salesforce to increase geographical coverage and launched multiple new products in its three major therapeutic areas of respiratory, oncology, and cardiology. This helped it outgrow the Indian pharma market in FY23 and FY24.

Has it found its winning formula?

Lupin's management is maintaining its focus on non-oral complex generics with these products making over 70 per cent of its current product pipeline. It recently acquired France-based pharma company, Medisol, for its crucial injectable patents. Lupin intends to leverage Medisol's technology to penetrate deeper into the US and European injectables markets.

The turnaround in FY24 is impressive, but it follows five painful years of stagnant revenue growth. Moreover, all its major geographies have seen minimal to negative growth between FY19 to FY24. Lupin's operating profit margins also remain among the lowest in the industry.

The company also pays no heed to its own history of failed investments. It continues to make questionable R&D choices that yield no outcomes. In recent years, it has had to write-off significant R&D and patent investments through impairment and amortisation. As a result, its depreciation costs remain very high. Take for instance, the impairment charge of Rs 714 crore it incurred in FY22 due to a failed attempt at a women-oriented specialty drug. Or the loss of Rs 201 crore on discontinuing a new product application in FY24. These are just two of some recent instances when Lupin's high R&D costs failed to generate any meaningful revenue.

On top of this, the company has been devoting large sums of money to build a biosimilar product portfolio since FY21. For the uninitiated, biosimilars are also off-patent drugs, with far more complex chemistry than a generic drug. Their development requires high expertise, capital investment, and long gestation periods. It currently has many biosimilar products in various phases of clinical trials, but their commercial feasibility remains doubtful.

Lupin is a serious case of hits and misses. The turnaround, although impressive, comes with a trail of problematic investments and muddled growth strategies. This makes it difficult to fully trust the management. Its steep depreciation costs, low margins and relatively higher valuation against peers should also not be ignored.

This story is not a recommendation. We suggest investors do their own due-diligence before making an investment decision.

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