Lupin has executed well on its US generic business over the last few years (CAGR 30% over the last 5 years) despite being a late entrant in the market. The investment in its ANDA pipeline has delivered key exclusive launches, market share gains and margin expansion. While Lupin’s absolute R&D spending has lagged other large Indian peers ($180 million vs. $280 million for Dr Reddy’s and $300 million for Sun Pharmaincluding Ranbaxy), we expect the R&D spending to pick-up to support earnings growth. The current valuation factors the strong organic growth and also the upside from potential M&A that is becoming imperative for the company.
Lupin has a defined focus on M&A given its $5 billion revenue target by FY18 with ~$1 billion contributed from acquisitions. While the company has pursued M&A in the past, the size of these deals has been small. We believe the recent announcement by the company seeking board approval for raising funds of Rs 7,500 crore (via shares, GDRs, ADRs, convertible bonds, etc.) indicates the company’s comfort in doing larger deals.