Brokerages expressed concerned over Lupin Ltd.'s margins remaining under pressure as it received a warning letter from the U.S. drug regulator. While they maintained their stance on the drugmaker, most of them -- if not all -- cut their target price on the stock.
Macquarie said Lupin's margins could be under pressure in the absence of big launches and continued research and development investments, according to its report. There is likely to be an increase in remediation costs too, which could further dent margins.
The pharmaceutical company received a combined warning letter from the U.S. Food and Drug Administration for its Goa and Indore-Unit II plants.
A warning letter is issued by the U.S. FDA if it finds that a manufacturer or any other organisation has violated a regulated activity. No new launches are usually allowed till the warning is lifted.
Here's what brokerages had to say about Lupin after it received warning letter:
Macquarie
- Stock Rating: Maintained ‘Neutral'
- Target Price: Cut to Rs 894 from Rs 1,022, implying a potential upside of 3.9 percent from yesterday's close.
- Lupin's US growth concerns just deteriorated further with the combined warning letter issued by the U.S. FDA for its Goa and Pithampur (Unit-2) facilities.
- The Goa facility is the most important facility for Lupin as it contributes more than 40 percent to U.S. sales.
- We do not expect any new approvals until the warning letter is lifted.
- Expect Lupin's margins to be under pressure in the absence of big launches and continued research and development investments.
- We note that absolute research and development spends could inch up in the next two financial years due to higher spends on clinical trials.
- We now expect remediation costs to increase as well, thereby further denting margins.
CLSA
- Stock Rating: Maintained ‘Buy'.
- Target Price: Cut to Rs 1,030 from Rs 1,260, implying a potential upside of 19.8 percent from yesterday's close.
- Goa and Indore plants account for 70 percent of U.S. sales and have 50 pending approvals.
- Lupin is looking to site transfer 12 products on a priority basis.
- Levothyroxine, a key approval for the next financial year, is not linked to the impacted plants.
- Despite the warning letter, we expect Lupin to maintain current U.S. sales of $200 million per quarter and an overall operating margin of 20 percent.
- Cut earnings per share estimates for the next two financial years by 15 percent and 20 percent respectively on lower U.S. sales.
Credit Suisse
- Stock Rating: Upgraded to ‘Neutral' from ‘Underperform'.
- Target Price: Cut to Rs 875 from Rs 900, implying a potential upside of 1.8 percent from yesterday's close.
- Upgraded stock rating as we see limited downside as we believe the contribution of the ex-US business is worth Rs 600 per share.
- Warning letter at Goa and Indore does not impact the key product Levothyroxine.
- Cut earnings per share estimates for the next financial year by 8 percent on the back of delayed launches.
- Next event is release of warning letter details which is expected by next week.
Morgan Stanley
- Stock Rating: Downgraded to ‘Equalweight' from ‘Overweight'.
- Target Price: Cut to Rs 847 from Rs 1,219, implying a potential downside of 1.5 percent from yesterday's close.
- Risk to near-term growth drives downgrade of the stock.
- The warnings letter could delay niche approvals by 9-15 months, leading to earnings headwinds.
- The share price could correct until the issues are resolved.
- Cut net profit estimates for the next two financial years by 24 percent and 22 percent respectively to account for lower U.S. business.
- Expect two-quarter delay of levothyroxime to the second half of the next financial year.
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