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You are here : IndiaNotes >> Research & Analysis >> Companies >> Lupin Ltd. >> Research

Lupin: Warning letter a negative surprise; assign Short

Equirus Securities | 14 Nov, 2017  | Follow Author | Add to my Favourites 
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In a negative surprise, USFDA today issued a combined warning letter (WL) to LPC’s formulation manufacturing facilities at Goa (oral solids) and Indore (Pithampur Unit II, opthalmics and oral solids). While we do not have access to the warning letter yet, management alluded that USFDA was not satisfied with the company’s response/remediation on hold-time studies and handling out-of-specification (OOS) issues. The WL impacts nearly one-third of LPC’s pending ANDAs, including key ones such as gRenagel, gRenvela, gWelchol, and gToprol; this is likely to further prolong the US business recovery. We cut FY18/FY19 earnings by 2%/15% as we now expect the US business to report a decline. Our TP stands revised to Rs 715 (Rs 1008 earlier) as we value the company at 18x Dec’18 earnings and Solosec at Rs 25/sh.


Warning letter – a negative surprise:
USFDA’s warning letter to LPC’s Indore (Pithampur Unit II) and Goa plant came as a negative surprise, as LPC had recently guided to clear both plants in a couple of months. The Goa plant was inspected in Apr’17 with three observations, while the Pithampur unit II had six observations from its May’17 inspection. As per LPC, USFDA was not satisfied with the company’s response on OOS and hold-time studies, and has asked for retrospective data since Jan’14. There is no clarity yet on how the retrospective data would be generated as old batches may not be available and LPC would have to check with FDA and external consultants on the way forward.


One-third pending ANDAs affected:
Of the roughly 150+ pending ANDAs, around 50 filed from both these plants will be impacted. Of these, 25-30 were expected to materialize in the medium term, including some high-value products, viz. gRenvela, gRenagel, gWelchol from Goa, and gToprol and gPropranolol from Indore. LPC has identified ~12 products which would be transferred to other sites. Importantly, gLovothyroxine filed from the Indore Unit I has not been affected.


US recovery delayed further:
With the ongoing price erosion, LPC’s US recovery was largely hinging on approvals of key products, which is now unlikely till the WL resolution; we believe WL on both plants will be lifted together and not separately, which could take anywhere between 6-18 months. Consequently, we expect US business to decline by US$ 30mn in FY19. Combined with higher remediation costs, this leads to a 15% cut in our FY19 earnings. We also lower our target multiple to 18x owing to the WL overhang; our revised TP stands at Rs 715 (vs. Rs 1008 earlier) and assign Short rating to the stock.
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