Analysts Corner | Lupin: ‘Buy’ with a fair value of Rs 840

By: |
April 01, 2020 8:11 AM

Valuations remain compelling with the stock now trading at ~5X FY2022 EV/Ebitda.

lpcLPC and MYL announced positive CHMP opinion recommending approval for Nepexto, LPC’s biosimilar for Enbrel (etanercept).

LPC announced a positive CHMP opinion for Nepexto (biosimilar Enbrel), LPC’s first biosimilar in the EU (partnered with MYL). The development highlights the optionality in LPC’s pipeline, with potential US filing for Neulasta in H2FY21 likely to add to its biosimilars efforts, while potential approval of ProAir in FY21 will be a key catalyst for the inhalation pipeline. The recent share price correction means that LPC valuations reflect only domestic segment valuations, with the market ascribing no value to the US despite a strong pipeline build-out. ‘Buy’.

LPC and MYL announced positive CHMP opinion recommending approval for Nepexto, LPC’s biosimilar for Enbrel (etanercept). Following the CHMP opinion, we now expect the European Commission to grant a centralized marketing authorization (MA) in May 2020. LPC had out- licensed Nepexto to Mylan for EU (along with other markets) in June 2018, and will receive 50% profit share from the product. Nepexto will be the fourth Enbrel biosimilar to be launched in the EU and will compete in a ~$1.48 bn market, split as $830 mn for the innovator brand, $485 mn for Biogen’s Benepali (first biosimilar), and ~$80 mn sales for Sandoz’ Erelzi (second biosimilar). Despite the relatively benign competitive dynamics, we do not expect meaningful near-term revenue or profit contribution from the product for LPC, given MYL’s disappointing market share performance on its recent EU biosimilar launches (partnered with BIOS), and expect peak sales of $50-100 mn for MYL by FY22/23, with LPC profit contribution at $20-40 mn from the product.

At this point, we see limited impact from Covid-19 so far, with the lockdown impact on manufacturing and logistics likely to be smoothened out over the coming few weeks, though, we do see USFDA inspections for Somerset, Goa and Indore getting pushed back to H2FY21. We expect only a transient impact on domestic market performance with performance likely to be normalized from Q2FY21. However, we do expect a negative hit on EM sales given cross currency exposure to South Africa (~`6 bn revenues), as well as Brazil/Mexico (~`6 bn revenues). However, we do see several levers to drive the Ebitda growth from FY21, including market share gains in levothyroxine, gradual loss reduction in Solosec, as well as ProAir approval, with significant room to drive margin expansion through operating leverage.

Valuations remain compelling with the stock now trading at ~5X FY2022 EV/Ebitda. At 15X Ebitda multiple on FY22, domestic segment accounts for entire market cap, with no value ascribed to the US. Nepexto approval underscores the significant optionality in the pipeline, including the inhalation basket (Fostair in the EU, Spiriva in the US) as well as biosimilars (Neulasta filing in FY21). ‘Buy’ with an unchanged fair value of `840/share, with following catalysts key for stock price performance re-inspection of Goa facility in H2FY21, market share gains in levo, progress in Solosec prescriptions, and visibility on ProAir approval.

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