Lupin continues to maintain that the situation will normalize by the March quarter. It expects some key launches to fall in place by then. Photo: Bloomberg
The runaway increase in Lupin Ltd’s share was jolted by its September quarter results. Since 27 July, the share had risen by 27% as of Monday. It fell by 5.3% on Tuesday, after the company’s sales rose 2% from a year ago and operating profit fell by 19.3%. Sales growth was much lower than expectations.
The company said it expects the US market to post substantial improvement only by the March quarter. Lupin had said this in July too, after it announced its results. But it also announced a large acquisition, paying $880 million to acquire US generics company Gavis. Investors put aside their concerns on slowing sales growth, as they liked this acquisition. The share uptrend sustained, getting an impetus in end-September when Lupin increased the price of a key diabetes drug sold in the US.
The September quarter’s results provide a rude reality check. US market sales have declined by 9.2% over a year ago and by 3% sequentially. That’s despite the rupee weakening against the dollar. The main reasons were price cuts because of rising competition, while new launches were not substantial in size to offset the decline. Expectations were that US market growth would be flat in this quarter.
In a conference call, the company management said inventories have risen, relative to June, as it had built up stocks anticipating higher sales growth.
The US market contributes to over two-fifths of formulation revenues. Its home market, India, too saw relatively slower growth of 9.4%. Some support from Europe and countries in the Rest of the World category ensured that overall sales grew by 2%.
The decline in the very profitable US market also puts its margins in trouble. Operating profit margin narrowed by 6 percentage points from a year ago and there was a slightly lower decline on a sequential basis. Although sales growth was low, its expenses grew just as in a normal quarter. It did not cut its research budget, a sensible decision from a longer viewpoint, which rose to 12.2% of sales from 10.2% in the June quarter.
Lupin continues to maintain that the situation will normalize by the March quarter. It expects some key launches to fall in place by then. The Gavis acquisition too should be completed, and will get consolidated. The full impact of the diabetes drug price hike too should reflect in its financials. The company said it is optimizing its US market portfolio.
All of this does sound reassuring, but this quarter’s results may make investors cautious, especially due to the sharp increase in its share. Less weight may be assigned to expectations and more to actual events.
The writer does not own shares in the above-mentioned companies.