Lower margin assumptions behind 7/3% cut in EPS for FY19-20e; TP down to Rs 800.
LPC’s Q4FY18 revenues were in line with our estimates, with the US showing signs of stability. Gross margins exceeded expectations, but Ebitda missed estimates by 9% due to higher SG&A spend, primarily related to Solosec promotion and remediation costs, which offset lower R&D. There was mixed progress on pipeline as LPC filed a P-IV on Spiriva in the US as well as Enbrel biosimilar in Japan, though it has put Advair on hold. Reduce with a revised target price of Rs 800/share.
FY19 to be thin; mixed progress on pipeline: LPC management remains optimistic on the US market, and suggested that pricing is finally bottoming out for the commodity end of the basket, though we do not expect a sharp recovery in pricing in the near term.
Given the sharp erosion in Fortamet/Glumetza in FY18, product concentration has come down dramatically, though the near-term launch pipeline remains weak, with Ranexa exclusivity being the only key launch expected in FY2019, apart from Solosec in the branded space. Levothyroxine remains a wild card. LPC filed a P-IV ANDA on Spiriva in Q1FY19, its first DPI filing in the US.
Valuations reasonable, though estimates factor in a full recovery: We tweak our FY19-20 EPS by 7/3%, largely on account of lower Ebitda margin assumptions. LPC is trading at 22X FY19 and 17X FY20 EPS, though EV/Ebitda multiples are now reasonable at 11X FY19 and 9X FY20 EV/Ebitda. Revised target price of Rs 800 values LPC at 18X FY2020 EPS.