Near-term concerns for Lupin

Fresh US Food and Drug Administration (FDA)'s observations on Lupin's Goa facility have added to concerns on the company's US business growth. Given that the facility accounts for 20-25 per cent of overall sales and 40-50 per cent of US sales, the concerns look justified. The stock, which has significantly underperformed markets, is down eight per cent over the last three trading sessions. It touched its 52-week lows of Rs 1,261 on Wednesday.

The Goa plant got an Establishment Inspection Report (EIR) from FDA six months back. An EIR indicates end of inspection without any observations. After that, approvals for launches in the US spiked. During the March quarter, Lupin got 11 approvals, and the pace has persisted. Hence, fresh FDA observations have sparked concerns over the product approval rate. These remarks come after inspections that ended on April 7.  

Sarabjit Kour Nangra at Angel Broking said it is difficult to assess the impact and the company still has time to respond. The company says it is in the midst of putting together a response to FDA's observations. 

Analysts at Sharekhan say the FDA observations pertain only to routine procedures, but any delay in key product approvals by US will add to the pressure on America business.

The other issue is that Lupin's diabetic products, which drove US growth during 2016, have come under competitive pressure. Recently, a foreign brokerage said that the market for the two diabetic drugs (Fortamet and Glumetza generics) was sharply down as sales volumes continued their shift towards another diabetes drug called Glucophage. 

In fact, there are not many expectations from Lupin for the March quarter. Analysts at Bank of America Merrill Lynch (Bofa-ML) said Lupin's US sales would decline three per cent from a year ago and remain flat sequentially during the March quarter. High base of last year was driven largely by the launch of diabetic drug Glumetza and raised prices for Fortamet.

There is a silver lining. The June quarter could bring some respite (over the March quarter) as the company has got US approvals for exclusivity launches of oral contraceptive drug Minastrine and limited-competition HIV drug Epistone. Analysts, including those at Bofa-ML, expect some pickup in growth from Q1FY18, aided by these new launches. In second half of FY18, further boost could come from launches such as Welchol and Hypocalcemia.

Against this backdrop, analysts believe long-term investors could buy Lupin stock on further fall in price.