US Approval For Key Production Site Seen Lifting Lupin’s Growth

Lupin, one of India’s top five drug makers by sales, has reported disappointing second quarter earnings. But investors are looking beyond those numbers and hoping the US FDA’s green light for the firm’s main exporting plant in Goa will increase generic drug approvals and accelerate growth.

Lupin Ltd group president Nikesh Gupta blamed a drop in profit in the last quarter on foreign exchange losses and higher R&D spending, and stressed the company is committed to improving “operational performance.”

The major Indian firm's first-half net profit jumped 58% to INR66.2bn ($974.2m) from the same year-earlier period on revenues that climbed 32% to INR42bn, although the profit figure still undershot market forecasts of INR73.6bn. Second quarter net profit meanwhile slumped by 25%.

But a clean bill of health just awarded by the US Food and Drug Administration to Lupin’s Goa plant - which removed the last US regulatory cloud hanging over the company - could be the medicine required to achieve a better showing, say analysts.

The Goa site, which accounts for fully 40% of Lupin’s US revenues, is expected to manufacture most of the company’s new products in the near term, including generic metformin and extended-released metformin that have been driving Lupin's US growth.

Much anticipated products pending US approval such as generic versions of kidney drug sevelamer, as well as kidney diabetes treatment colesevelam, are also made at the plant.

Full Compliance

With the FDA sign-off on the facility, all of Lupin’s operations are now compliant with regulations set by drug regulators globally, unlike a number of factories belonging to its Indian peers. In fact, the clearance has made Lupin one of the few large pharmaceutical firms in the world not to have any outstanding FDA compliance issues, analysts note.

Brokerage Bank of America-Merrill Lynch, which has made Lupin its top pick among Indian pharmaceutical companies, says the FDA nod should boost investor confidence in the company’s management. Lupin is “the only large-cap Indian [pharmaceutical] company with a relatively stronger regulatory track record,” analyst Manoj Garg observed. Garg has a price target of INR1,950 for Lupin’s stock, around a 35% upside to the closing price of INR1,440.95 on Nov. 15.

More FDA Approvals Coming

Lupin's performance has been hurt in recent quarters by a lower number of FDA approvals but the company sees an upturn. “We expect a larger number of [FDA] approvals now we’re through with the Goa 483,” said Lupin’s chief executive Vinita Gupta, Nikesh’s sister.

The FDA issues a Form 483 after an inspection if it spots any regulatory violations and unless satisfied with the solutions can ultimately ban exports from the factory until problems are fixed.

“Near-term, we should have at least four to five products out of India between Goa as well as Indore [also in southern India] and four to five products out of [Lupin’s US facility in] Somerset, N.J. in the next couple of quarters,” Vinita said.

With the FDA working hard to clear up its approval backlog, “We’d expect a good part of our backlog will also clear in the next two years - in fiscal year 2018 and 2019,” she predicted.

The company has launched five products so far this fiscal year and expects to launch “10-plus,” Vinita said. “We’ll have 15-16 launches next year. We will hope that [the figure] would double [in fiscal 2019] and that we can stay at that 30-plus level over the next couple of years.”

Diversifying Revenues

Analysts believe the expected flurry of FDA approvals will diversify Lupin’s US revenue stream as metformin products are now facing more competition. Lupin, which entered the US generic market in 2003, is the fifth-largest generic player in the US by prescriptions and its US sales in the three months to September climbed by 70% year-on-year to $292m.

By contrast, revenue growth in India, its second-largest market, rose a far slower 12% to INR9.96bn.

The company, founded by Vinita‘s and Nikesh’s father, Desh Bandhu Gupta, in 1968 with a $120 investment, was one of India’s early pharmaceutical players. The siblings have aggressively sought to put Lupin on a new growth trajectory by acquiring around a dozen companies over the last decade.

Six were acquired in the last couple of years and Lupin’s inorganic growth drive has significantly expanded its geographical reach and boosted revenues.

Gavis Underperforming

But one acquisition that has not performed as well as hoped is Lupin’s purchase of New Jersey-based generic drug maker Gavis Pharmaceuticals LLC and its Somerset R&D operation for $880m in July 2015.

Lupin bought Gavis with the ambition of boosting US sales by broadening its pipeline in such areas as dermatology, controlled-substance products, and other high-value and niche generics. The purchase also gave Lupin its first manufacturing facility in the US.

Indian generics manufacturers have been seeking US acquisitions to widen product pipelines as tighter US regulatory scrutiny of Indian and other foreign plants has made it harder to get drug approvals in the world’s biggest drugs market.

Vinita said Lupin was six months behind in its plan to ramp up the operations of Gavis, which faces continued pricing pressure on its base portfolio and rising competition. At the time of the purchase, Vinita said the company expected to triple Gavis’s revenues by 2018 from $96m.

She rowed back on that projection in a conference call with analysts on Nov. 9 following the earnings’ release, saying revenues were now expected to total around $250m by 2018.

The company had been “a little bit delayed in our plan to ramp up Gavis” but “we have all of the growth initiatives well on the way,” she said.

New US Launches

Now that capacity expansion is in place, there will be “material launches in the next couple of months and we also expect new product approvals out of Gavis over the next couple of months, in particular the controlled-substances front,” the executive added.

On Nov. 15, Lupin said it had launched in the US market Amabelz tablets, a generic version of Amneal Pharmaceuticals LLC’s Activella (estrogen and progestin) tablets which has annual sales of around $91m and is used to prevent postmenopausal osteoporosis.

“We also hope to launch a couple of material-controlled substances, hydrocodone APAP, oxycodone APAP, [for which] we’re expecting approval in the next couple of months. So, we will hope to launch at least by the fourth-quarter if not the third quarter.”

She said Methergine (methylergonovine) tablet for preventing and managing postpartum hemorrhage should also start contributing to growth soon. “We expect Methergine to pick up starting this quarter to help both the breadth of the business as well as contribution out of Gavis. We expect to start launching other products out of Gavis like potassium chloride with the capacity expansion. We are now scaling up the product and will hope to launch in the next couple of months,” Vinita said.

US Election Impact

Regarding Donald Trump’s US election victory, Vinita said: “Maybe the Republicans are a little better than the Democrats [for the Indian pharmaceutical industry] but at the end of the day, really the market conditions around our industry are tough enough to keep us grounded.”

She said the company did not expect much of a change for the sector in the business environment under a Trump administration. “We have enough pressures from multiple stakeholders in the industry, whether it’s our customers with the consolidation of the customer end and the pressures that they are facing that ultimately gets to us and then the public focus around pricing.”

Fitch Ratings said Nov. 15 it expected “moderate” price erosion in the existing generic portfolios of Indian drug firms amid ongoing US pressure to contain healthcare costs.

Still, Vinita said: “Right now we are really looking at single-digit price erosion. Again it’s very hard to predict. It could go into double-digit if we have a major event in the marketplace, which as of now the only one I foresee is this Wal-Mart McKesson coming together.”

Retailing giant Wal-Mart and US drug distributor McKesson said in May they would expand an alliance for jointly obtaining generic medicines to cut costs.

“As the FDA clears the [approval] backlog, maybe there’s more competition on existing baseline products, but we should also start seeing a good contribution of new products that we have filed to the FDA,” she said, adding “product launches will offset any erosion in our existing baseline business.”

“Also, as I look at the next two years, we will see an increasing contribution out of areas like dermatology given the Gavis pipeline as well as our own pipeline, we will see increased contribution of controlled substances,” she said.

Door Open

She dismissed speculation that Indian Prime Minister Narendra Modi’s “Make In India” plan to encourage manufacturers to keep factories at home and spur job-creation for India’s tens of millions of new job entrants each year would hamper foreign manufacturing.

“Today 40% of the US generic industry is supplied by India. And I think more than ‘Make in the US,’ (drug) pricing as one has seen over the last couple of quarters, last year and a half, has been a huge issue in the US,” Vinita said.

“So, I can’t imagine they will ignore pricing and affordable medicines and close the doors in the US to just US manufactured products. It will not serve their overall cause of reducing healthcare expenditure.”

From the editors of PharmAsia News.