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Why Credit Suisse Turned Positive On Lupin After Three Years

Credit Suisse changed the rating from ‘Underperform’ to ‘Outperform’.

Pills are arranged for a photograph at a pharmacy in Princeton, Illinois, U.S. (Photographer: Daniel Acker/Bloomberg)
Pills are arranged for a photograph at a pharmacy in Princeton, Illinois, U.S. (Photographer: Daniel Acker/Bloomberg)

Credit Suisse upgraded Lupin Ltd. after three years, suggesting the brokerage has turned optimistic on the drugmaker even as three of its key plants can’t seek fresh approvals in the U.S.

The brokerage changed the rating from ‘Underperform’ to ‘Outperform’. It also raised the target from Rs 800 apiece to Rs 860, implying a 12-month upside of nearly 21 percent from Friday’s closing price.

Concerns on ramp-up of Solosec, used to treat vaginal bacterial infection, and margin contraction have played out, Anubhav Aggarwal, pharma analyst at Credit Suisse, wrote in a note. The brokerage is betting on increased free cash flows over three to four years, saying that the market is ignoring opportunities in generic Enbrel (rheumatoid arthritis) in Europe and Spiriva inhaler (chronic pulmonary obstructive disease) in the U.S.

Shares of the drugmaker jumped as much as 3.9 percent, the most in two months, in today’s trade even as the Nifty Pharma was trading 0.15 percent higher at 1:30 p.m. The stock, however, has fallen more than 12 percent so far this year in line with most of the pharma peers. Lupin’s three plants have received “official action indicated” from the U.S. Food and Drug Administration and are unlikely to win new approvals till remedial measures are taken.

Of the 46 analysts covering the stock, 20 recommend ‘Sell’ and 16 suggest ‘Buy’, according to Bloomberg. The average of 12-month target prices suggests and upside of 10 percent.

Credit Suisse had downgraded Lupin in August 2016 because of the concentration risk of three key drugs—Fortamet, Minastrin and Glumetza—that contributed 50 percent of Lupin’s profit in 2017-18.

But the brokerage has turned optimistic now. It expects the drugmaker to be close to debt-free by FY23 because of three reasons:

  • Margins bottoming out in FY19 and improvement driven by ramp-up in Levothyroxine (thyroid hormone deficiency), Solosec and Albuterol inhaler (asthma) in FY21.
  • Launches of generic versions of Enbrel in FY22 and Spiriva in FY23.
  • Moderate capex and R&D expenditure.

Lupin had turned into a net debt company in the past four years due weak acquisitions like Gavis and Solosec and low free cash flows.

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