lupin - credit suisse

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

03 August 2016

Asia Pacific/India

Equity Research

Specialty Pharmaceuticals

Lupin

(LUPN.BO / LPC IN) DOWNGRADE RATING

High profit concentration risk; risk-reward

turns unfavourable now

■ Downgrade to UNDERPERFORM as high profit concentration risk is

not priced-in. In our view, the risk-reward is no longer favourable with the

stock pricing in upside from clearance of the Goa facility but not reflecting

high profit concentration risk with gFortamet accounting for 35-40% of FY17

profits. We reduce our estimates (FY18 EPS by 16%) as we factor in

Fortamet competition (Mylan and Nostrum could launch) and cut our TP to

Rs1,450 (from Rs1,905).

■ Only mid-single digit profit CAGR over next two years. As competition in

Fortamet enters, FY18 should be a year of no growth and next two-year profit

CAGR should be just mid-single digit. This is led by high profit concentration

with almost half of FY18 profits driven by three drugs (Fortamet, Glumetza and

Minastrin). Similar concentration for peers is lower (Sun: 20%, Dr. Reddy's:

35%). Our estimates assume full contribution from Renagel, Renvela, Welchol

(Goa resolution) and continued exclusivity on Minastrin.

■ Profitability to peak out in 1Q17 results. We expect 1Q17 results next

week to mark the peak quarter profitability for Lupin over next two years as

Glumetza exclusivity is now over and R&D expense should increase as

clinical trials for DPI Inhalers start in the US.

■ Low margin of safety as it is trading at high end of historical valuations.

Lupin is trading at high end of historical valuations at 23.5x FY18 EPS. Thus

margin of safety is low with high concentration risk. Our target price is based

on 20x FY18 EPS where we value Fortamet at 10x P/E and base business

at 22x FY18 EPS. Risks: (1) no further competition in Fortamet until patent

expiry in Mar-2021 (2) faster approvals from Goa facility before FY18.

Share price performance

80

130

180

1000

1500

2000

Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the S&P

BSE SENSEX IDX which closed at 27748.14 on 02/08/16

On 02/08/16 the spot exchange rate was Rs66.94/US$1

Performance over 1M 3M 12M Absolute (%) 8.9 6.2 3.7 — Relative (%) 7.2 -3.7 4.8 —

Financial and valuation metrics

Year 3/16A 3/17E 3/18E 3/19E Revenue (Rs mn) 142,084.7 185,669.0 213,346.6 238,931.9 EBITDA (Rs mn) 37,534.5 52,155.1 53,952.8 59,461.0 EBIT (Rs mn) 32,310.2 43,551.7 42,842.4 47,850.6 Net profit (Rs mn) 22,117.6 32,495.7 32,560.0 36,629.6 EPS (CS adj.) (Rs) 49.3 72.5 72.6 81.7 Change from previous EPS (%) n.a. 3.4 -16.1 Consensus EPS (Rs) n.a. 65.7 78.0 90.2 EPS growth (%) -8.0 46.9 0.2 12.5 P/E (x) 34.6 23.5 23.5 20.9 Dividend yield (%) 0.44 0.62 0.62 0.70 EV/EBITDA (x) 22.2 15.9 15.1 13.4 P/B (x) 7.0 5.6 4.6 3.9 ROE (%) 22.3 26.3 21.5 20.2 Net debt/equity (%) 57.5 45.0 28.3 13.6

Source: Company data, Thomson Reuters, Credit Suisse estimates.

Rating (from Outperform) UNDERPERFORM*

Price (02 Aug 16, Rs) 1,704.35 Target price (Rs) (from 1,905.00) 1,450.00¹ Upside/downside (%) -14.9 Mkt cap (Rs mn) 768,630 (US$ 11,483) Enterprise value (Rs mn) 830,632 Number of shares (mn) 450.98 Free float (%) 47.0 52-week price range 2,107.0 - 1,401.4 ADTO - 6M (US$ mn) 44.5

*Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

Research Analysts

Anubhav Aggarwal

91 22 6777 3808

[email protected]

Chunky Shah

91 22 6777 3872

[email protected]

03 August 2016

Lupin

(LUPN.BO / LPC IN) 2

Focus charts and tables Figure 1: Product concentration for Lupin is the highest

(even after building-in competition in Fortamet in FY18)

Figure 2: Fortamet and Glumetza accounts for almost half

of current US sales

0%

10%

20%

30%

40%

50%

Lupin Dr. Reddy's Sun

% FY18 eps contribution from top 3 pdts

-

50

100

150

200

250

300

350

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

Lupin US quarterly sales

Base sales Fortamet Glumetza$ mn

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 3: Mylan & Nostrum have settled litigation on Fortamet and could enter before patent expiry

Date Event

15-Jan-09 Lupin sued on Fortamet

18-Feb-10 Mylan sued on Fortamet

13-Jul-12 Nostrum sued on Fortamet

13-Mar-13 Mylan settles on Fortamet to launch on 1-Aug-2013

3-May-13 Nostrum settles for launch before patent expiry in Mar-2021 - approval awaited from FDA

13-Jun-13 Lupin settles on the litigation and launches

20-Mar-18 6,099,859 patent on Fortamet expiries

17-Mar-21 6,866,866 patent on Fortamet expiries

Source: Company data, Credit Suisse research

Figure 4: Expect no profit growth in FY18 and only 12% in FY19 due to hit in Fortamet

FY17E FY18E FY19E

Total EPS 72 73 82

Fortamet 31 15 10

Glumetza 16 9 9

Minastrin 3 11 4

Renvela+Renagel+Welchol - 9 10

Base EPS pre R&D 60 74 92

R&D 37 44 45

Total EPS growth 47% 0% 12%

Base EPS growth (pre R&D) 17% 23% 25%

Source: Company data, Credit Suisse estimates

Figure 5: Gavis ramp-up has been slower than expected

so far

Figure 6: Lupin is trading at high end of historical

valuations and thus low margin of safety

10

15

20

25

30

35

Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16

Gavis Trailing 3-month sales ($mn)

0x

5x

10x

15x

20x

25x

30x

35x

Aug-11 Mar-12 Oct-12 May-13 Dec-13 Jul-14 Feb-15 Sep-15 Apr-16

Lupin 1 yr fwd PE Lupin last 5 year Avg PE

Source: IMS Health, Credit Suisse research Source: I/B/E/S estimates, Credit Suisse research

03 August 2016

Lupin


High profit concentration risk; risk-reward turns unfavourable now Profit concentration risk higher in Lupin vs peers

Profit concentration for Lupin has increased significantly post price increase taken by

Lupin in Fortamet in Sep-2015 and Glumetza market size increasing many folds after

Valeant implemented price increase in July-2015. Currently, both these products account

for almost half of the US sales for Lupin. Glumetza exclusivity has now expired and with

Sun and Actavis both getting approval, there is no further positive surprise on Glumetza.

However, the market is still ignoring very high profit concentration in Fortamet which

accounts for 35-40% of FY17 profits for Lupin. Both Mylan and Nostrum have settled with

the Innovator to launch before the patent expiry and given Fortamet's market size has now

increased to 3x, the incentive is higher for Mylan to launch now.

In comparison to peers, profit concentration is much higher for Lupin with top 3 drugs

(Fortamet, Glumetza and Minastrin) accounting for almost half of consolidated FY18

profits. In comparison, profit concentration is lower for peers with top three drugs (Absorica,

Gleevec, Doxil) contributing about 20% to Sun's FY18 profits while Dr. Reddy's gets 35%

of profits from top three drugs (Decitabine, Metoprolol, Sumatriptan).

Expect mid-single digit EPS CAGR over next two years

Lupin should be a beneficiary of faster approvals in the US with strong pipeline of 163

pending ANDAs (as of 31-Mar-2016). Therefore we build in strong base business growth of

20%+CAGR over next three years for Lupin. This also includes full contribution from

resolution of the Goa plant (and hence inclusion of key products namely Renagel, Renvela

and Welchol). However, we expect overall profit growth to be weak due to high contribution

of few products where we expect more competition. We build in Fortamet competition in

FY18 which neutralises the impact of base business growth and further hit to Minastrin in

FY19 leads to overall profit growth to be low at mid-single digit CAGR over next two years.

Our estimates also include positive benefit of recent acquisition of 21 products in Japan

which is EPS accretive (FY17 EPS up by 3%) but in our view pay-back period is longer at

more than seven years given these are off patent products and there will be both volume

loss (generics taking away market share) and price cut (bi-annual price cut).

On the base business, Gavis acquisition ramp-up so far has been slower than expected

with 1Q17 IMS sales for Gavis showing 3% decline QoQ even adjusted for branded

Methergine which now is launched under Lupin label. We note that this is early integration

period for Lupin as Gavis was acquired only in Feb-2016.

Downgrade to UNDERPERFORM (from Outperform)

We turn cautious on Lupin as the risk-reward is no longer favourable with the stock pricing in

clearance of Goa facility (in-line with our views) but at the same time not reflecting high risk

from incremental competition in gFortamet. The stock is trading at 23x FY18 EPS and is

valuing Fortamet profits at high multiple despite a high possibility of Mylan and Nostrum

entering Fortamet before patent expiry (Mar-2018 and Mar-2021). We cut our FY18 EPS by

16% as we factor in competition in Fortamet. Our FY18 estimates include full contribution of

Renagel, Renvela, Welchol (Goa resolution) and continued exclusivity on Minastrin beyond

six months. There could be downside risks to our number if there is delay in approval due to

Goa clearance or product specific delay (Renagel, Renvela and Welchol). Our FY17 EPS

increases by 3% due to the Shionogi product acquisition in Japan. Our target price declines

to Rs1,450 (from Rs1,905) and is based on 20x FY18 EPS where we value Fortamet at 10x

P/E and base business at 22x FY18 EPS. Risks: (1) no further competition in Fortamet till

patent expiry in Mar-2021 (2) faster approvals from Goa facility before FY18.

Fortamet market size has

increased to 3x now and it

offers high incentive for

Mylan to pursue Fortamet

generic opportunity again

Profit concentration at Lupin

is higher than peers with top

3 drugs accounting for half

of FY18 profits (Sun: 205

and DRL at 35%)

We expect strong base

business growth of 20%+

CAGR over next three years

but due to high

concentration and hit to

Fortamet profits we expect

overall profit growth to be

weak

We value base business at

22x FY18 EPS while

Fortamet profits at 10x FY18

profits

We build full contribution

from Goa facility in FY18

with contribution included

from Renagel, Renvela and

Welchol. We also include

extended exclusivity on

Minastrin beyond six months

03 August 2016

Lupin


Global pharma valuation table Figure 7: Valuation comparison of Indian pharma companies

2 Aug 2016 M cap

(US$

mn)

CMP Rating TP Upside/

(down-

side)

(%)

Sales ($ mn) EBITDA

margin (%)

EPS

growth

(%)

P/E

(x)

P/B

(x)

RoE

(%)

EV/EBITDA

(x)

FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18

India

Sun 29,797 829 O 880 6 6,531 6,357 34.2 35.5 42 20 26.0 21.7 5.3 4.4 20 20 18.2 14.6

Lupin 11,396 1,704 U 1,450 -15 3,915 3,955 28.1 25.3 47 0 23.5 23.5 5.6 4.6 24 20 15.8 15.0

Dr. Reddy's 7,318 2,977 U 2,750 -8 3,068 3,101 17.5 22.5 -23 50 32.6 21.7 4.0 3.4 12 16 19.0 12.6

Cipla 6,221 519 O 565 9 3,363 3,393 17.0 17.9 6 27 26.0 20.4 3.1 2.7 12 13 16.7 13.6

Aurobindo 6,676 765 O 950 24 3,293 3,292 23.7 24.8 25 20 17.5 14.6 3.7 3.0 21 20 13.1 10.5

Cadila 5,320 348 O 405 16 2,190 2,292 19.8 21.1 4 32 22.6 17.1 5.5 4.4 24 26 18.1 13.6

Torrent 3,742 1,480 O 1,500 1 1,289 1,283 26.0 25.7 -35 14 22.4 19.6 6.0 4.9 27 25 16.4 13.8

Glenmark 3,397 842 N 840 0 1,836 1,916 21.7 22.1 48 26 22.2 17.7 4.5 3.6 20 21 13.7 11.1

Strides 1,527 1,144 O 1,420 24 947 938 19.8 20.6 111 27 18.3 14.5 3.0 2.5 16 17 13.7 11.2

IPCA 968 512 O 640 25 689 705 17.4 19.1 86 36 20.5 15.1 2.5 2.2 12 15 12.8 10.2

India: Not Covered

Alembic 1,755 623 478 558 19 22 -41 36 27.2 20.3 5.9 5.1 26 27 20.3 15.2

Ajanta 2,397 1,823 313 370 34 34 21 22 33.2 27.1 10.1 7.9 34 31 22.8 19.2

Indoco 430 313 175 211 18 20 45 37 23.6 17.4 4.2 3.5 19 22 13.5 10.2

Natco 1,582 608 238 279 29 28 103 15 33.5 29.1 7.1 5.8 22 20 22.8 20.2

Global Generics: US

Actavis 99,186 251 16,714 18,231 49 51 12 19 17.7 14.3 1.1 1.1 7 9 17.3 15.3

Teva 48,409 53 22,344 25,308 36 37 16 19 10.0 8.8 1.6 1.5 14 16 6.4 5.4

Mylan 23,654 47 10,902 13,200 33 34 20 24 9.4 8.0 2.5 2.2 23 30 9.5 7.2

Perrigo 13,121 92 5,952 6,305 32 31 10 8 10.1 9.3 1.2 1.1 10 13 9.4 9.2

Taro 5,995 140 1,000 950 65 65 -1 -5 10.9 11.3 2.4 1.9 22 17 9.2 9.7

Akorn 3,928 33 1,075 1,158 45 46 6 11 15.3 13.9 4.7 3.6 32 28 9.5 8.7

Impax Labs 2,286 31 994 1,157 25 30 22 47 17.5 12.1 2.2 1.9 11 17 10.3 7.2

Global Generics – Non US

Aspen 12,015 370 3,170 3,313 29 30 35 12 21.3 17.8 3.8 3.2 20 20 15.2 14.2

Hikma 8,534 2,672 2,054 2,479 23 28 -26 76 36.7 22.1 3.1 2.7 10 13 17.9 11.9 Richter Gedeon 3,904 5,817 1,339 1,467 23 25 -11 23 22.4 17.9 1.7 1.6 8 9 11.5 10.0

Note: O = Outperform, N = Neutral, Not Covered : Credit Suisse Equity Research does not provide ongoing

coverage of the company or offer an investment rating or investment view on the equity security of the

company or related products.

Source: IBES for Not Covered companies, Credit Suisse estimates for others

03 August 2016

Lupin


Profit concentration risk higher in Lupin versus peers Profit concentration for Lupin has increased significantly post price increase taken by

Lupin in Fortamet in Sep-2015 and Glumetza market size increasing many folds after

Valeant implemented price increase in July-2015. Currently both these products account

for almost half of US sales for Lupin. Glumetza exclusivity has now expired and with Sun

and Actavis both getting approval, there is no further positive surprise on Glumetza.

However, the market is still ignoring very high profit concentration in Fortamet which

accounts for 35-40% of FY17 profits for Lupin. Both Mylan and Nostrum have settled with

the Innovator to launch before the patent expiry and given Fortamet's market size has now

increased to 3x, the incentive is higher for Mylan to launch now.

In comparison to peers, profit concentration is much higher for Lupin with top 3 drugs

(Fortamet, Glumetza and Minastrin) accounting for almost half of consolidated FY18

profits. In comparison, profit concentration is lower for peers with top three drugs (Absorica,

Gleevec, Doxil) contributing about 20% to Sun's FY18 profits while Dr. Reddy's get 35% of

profits from top three drugs (Decitabine, Metoprolol, Sumatriptan).

Almost half of current US sales are contributed by

Fortamet and Glumetza

Lupin's US quarterly sales run-rate has picked up from ~US$175 mn to US$325 mn in

4Q16 (Figure 8) largely driven by Fortamet price increase and Glumetza exclusivity.

Fortamet and Glumetza put together accounted for almost half of US sales for the Mar-16

quarter. The contribution for 1Q17 is also expected to remain high from these two drugs.

Figure 8: Glumetza and Fortamet key contributors for Lupin US sales

-

50

100

150

200

250

300

350

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

Lupin US quarterly sales

Base sales Fortamet Glumetza$ mn


Glumetza: Sun and Actavis have got approvals; no positive surprise for Lupin here

Lupin was First to File on Glumetza and now new competition has started to enter

Glumetza. Sun and Actavis both have received approvals post the 180 days exclusivity

expiry. Sun is expected to launch over next few weeks. Therefore, 1Q17 should be the

peak quarter of profitability for Lupin over next two years.

Fortamet market size has

increased to 3x now and it

offers high incentive for

Mylan to pursue Fortamet

generic opportunity again

Profit concentration at Lupin

is higher than peers with top

3 drugs accounting for half

of FY18 profits (Sun: 205

and DRL at 35%)

03 August 2016

Lupin


Fortamet: Mylan and Nostrum have already settled with the Innovator

There are two main patents pending on Fortamet (1) '859 expires in Mar-2018 and (2) '866

expires in Mar-2021. Both Mylan and Nostrum have already settled on Fortamet litigation.

Nostrum settlement mentions that they can launch before Mar-2021 expiry whereas Mylan

settlement allowed them to launch post 1-Aug-2013. Given Fortamet drug size has

increased by 200% since then to almost ~$500mn now (Figure 11) (benefit of price

increase and volume gain from Pioglitazones), there is a strong incentive for Mylan to

pursue Fortamet application again (price increase in Fortamet happened in Sep-2015).

We are building in one of the two to launch in FY18. Currently, Fortamet is a two player

market with Lupin having 64% market share and Actavis is the other player.

Figure 9: Patents remaining on Fortamet

Patent Expiry Description

6,099,859 20-Mar-18 Controlled release oral tablet having a unitary core

6,866,866 17-Mar-21 Controlled release metformin compositions


Figure 10: Sequence of Events on Fortamet litigation

Date Event

15-Jan-09 Lupin sued on Fortamet

18-Feb-10 Mylan sued on Fortamet

13-Jul-12 Nostrum sued on Fortamet

13-Mar-13 Mylan settles on Fortamet to launch on 1-Aug-2013

3-May-13 Nostrum settles for launch before patent expiry in Mar-2021 - approval awaited from FDA

13-Jun-13 Lupin settles on the litigation and launches


Figure 11: Fortamet market size has gone up 2x post price increase

-

100

200

300

400

500

600

700

800

900

1,000

Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16

Fortamet IMS mkt size ($mn)

Source: IMS Health, Credit Suisse research

Profit concentration risk higher in Lupin versus peers

Fortamet alone contributes 40% of FY17 EPS for Lupin and even building-in incremental

competition in FY18, accounts for 20% of FY18 EPS. This is the largest contribution for a

single product across our coverage.

In terms of contribution of top 3 drugs of Lupin (Fortamet, Glumetza and Minastrin) to

FY18 profits, the concentration is much higher for Lupin compared to Sun (Absorica,

Gleevec, Doxil) and Dr. Reddy's (Decitabine, Metoprolol, Sumatriptan). Almost half of

Lupin's FY18 profits come from top 3 drugs in the US compared to one-third for Dr.

Reddy's and about 20% for Sun Pharma ( Figure 12)

03 August 2016

Lupin


Figure 12: Product concentration for Lupin is the highest among peers (even after

building-in competition in Fortamet)

0%

10%

20%

30%

40%

50%

Lupin Dr. Reddy's Sun

% FY18 eps contribution from top 3 pdts


Figure 13: Competitive profile in Lupin's top 3 products

Top 3 US pdts % of FY18 base EPS Competition threat

Fortamet 19% Mylan has approval; Nostrum has settled. Patent to expire in Mar-2018 and Mar-2021

Glumetza 13% Actavis and Sun have got approval; low competition post that

Minastrin 24 FE 14% Amneal and Mylan have litigations on Minastrin

Total 46%


03 August 2016

Lupin


Expect mid-single digit EPS CAGR over next two years Lupin should be a beneficiary of faster approvals in the US with strong pipeline of 163

pending ANDAs (as of 31-Mar-2016). Therefore we build in strong base business growth

of 20%+CAGR over next three years for Lupin. This also includes full contribution from

resolution of the Goa plant (and hence inclusion of key products namely Renagel, Renvela

and Welchol). However we expect overall profit growth to be weak due to high contribution

of few products where we expect more competition. We build in Fortamet competition in

FY18 which neutralises the impact of base business growth and further hit to Minastrin in

FY19 leads to overall profit growth to be low at mid-single digit CAGR over next two years.

Our estimates also include positive benefit of recent acquisition of 21 products in Japan

which is EPS accretive (FY17 EPS up by 3%) but in our view pay-back period is longer at

more than seven years given these are off patent products and there will be both volume

loss (generics taking away market share) and price cut (bi-annual price cut).

On the base business, Gavis acquisition ramp-up so far has been slower than expected

with 1Q17 IMS sales for Gavis showing 3% decline QoQ even adjusted for branded

Methergine which now is launched under Lupin label. We note that this is early integration

period for Lupin as Gavis was acquired only in Feb-2016.

Base business growth strong but it’s the high

concentration which leads to low growth

Lupin has a strong pipeline in the US with 163 pending ANDAs (as of 31-Mar-2016) with

one-third of the pending ANDAs at Gavis. We expect Lupin to be a beneficiary of faster

approvals in the US and therefore build in strong ramp-up of the base business where we

expect base business growth at 20%+ CAGR over next three years (Figure 14). However,

we expect a flat year on profits in FY18 due to expected competition from Fortamet and

lower profit growth in FY19 due to competition in Minastrin (Amneal and Mylan also have

litigations on Minastrin).

Figure 14: Split of profits for next three years

FY17E FY18E FY19E

Total EPS 72 73 82

Fortamet 31 15 10

Glumetza 16 9 9

Minastrin 3 11 4

Renvela+Renagel+Welchol - 9 10

Base EPS pre R&D 60 74 92

R&D 37 44 45

Total EPS growth 47% 0% 12%

Base EPS growth (pre R&D) 17% 23% 25%


We expect strong base

business growth of 20%+

CAGR over next three years

but due to high

concentration and hit to

Fortamet profits we expect

overall profit growth to be

weak

03 August 2016

Lupin


We build in full contribution from Goa resolution

from FY18

Figure 15: Lupin's US sales ramp-up in our estimates

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

4Q16

ann

ualiz

ed

Glu

met

za

Gav

is

Min

astr

in

Oth

ers

(net

of p

rice

eros

ion)

FY

17

For

tam

et h

it

Min

astr

in fu

ll yr

Ren

vela

+ R

enag

el +

Wel

chol

Gav

is

Oth

ers

(net

of p

rice

eros

ion)

FY

18

Lupin US sales ($mn)

2% growth

12% growth


Goa plant had received nine observations each in inspection in July-15 and later in Mar-16.

Lupin had received an Establishment Inspection Report (EIR) for the Jul-2015 inspection

in early July-16 and tentative approval for Lexiva on 27 July 2016. Getting a tentative

approval is positive and could mean that FDA has assigned a "VAI" flag to the inspection

reducing the chance of further escalation / delay in resolution. In our forecast, we have

assumed Goa plant clearance by end of FY17. Therefore, we build in full contribution from

key products namely Renagel, Renvela and Welchol (products which have been getting

delayed since FY15) in our estimates.

Gavis run-rate lagging management guidance

Gavis ramp-up is running below our estimates. IMS sales suggests that Gavis sales have

not ramped-up in 1Q17 quarter (infact Jun quarter IMS sales for Gavis have shown 3%

decline over the Mar-quarter adjusting for branded Methergine which now is launched

under Lupin label). We note that this is early integration period for Lupin as Gavis was

acquired only in Feb-2016.

03 August 2016

Lupin


Figure 16: Gavis run-rate has largely remained flattish since acquisition

20

22

24

26

28

30

32

34

Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16

Gavis Trailing 3-month sales ($mn)

Source: IMS Health, Credit Suisse research

Product acquisitions in Japan is EPS accretive but

payback period high at 7+ years

Lupin acquired 21 off-patent products from Shionogi in Japan for $150mn. The acquisition

enables Lupin to enter Japanese branded market. These products have sales of $90mn

on NHI price basis or $81mn at manufacturer level. The acquisition is EPS accretive

(FY17 EPS up by 3%) but payback is longer than seven years as sales will decline due to

volume loss (generics taking away market share) and price cut (bi-annual price cut). We

have built in positive benefits from this acquisition in the near term.

Figure 17: Japan Deal likely to have payback period of more than 7 years

Key assumptions

Acquired sales ($mn) 90

At Manufacturer ($mn) 81

EBITDA Margin 45%

Annual price erosion 4%

Annual volume loss to generics 2%

Tax rate 30%

Payback - calculation Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9

Sales ($mn) 81 76 72 67 63 59 56 53 49

EBITDA ($mn) 36 33 30 27 25 22 20 17 15

EBITDA Margin 45% 44% 42% 41% 39% 37% 35% 33% 31%

PAT ($mn) 26 23 21 19 17 15 14 12 11

Payback period 7+ Source: Company data, Credit Suisse estimates

03 August 2016

Lupin


Downgrade to UNDERPERFORM (from Outperform) We turn cautious on Lupin as the risk-reward is no longer favourable with the stock pricing in

clearance of Goa facility (in-line with our views) but at the same time not reflecting high risk

from incremental competition in gFortamet. The stock is trading at 23x FY18 EPS and is

valuing Fortamet profits at high multiple despite a high possibility of Mylan and Nostrum

entering Fortamet before patent expiry (Mar-2018 and Mar-2021). We cut our FY18 EPS by

16% as we factor in competition in Fortamet. Our FY18 estimates include full contribution of

Renagel, Renvela, Welchol (Goa resolution) and continued exclusivity on Minastrin beyond

six months. There could be downside risks to our number if there is delay in approval due to

Goa clearance or product specific delay (Renagel, Renvela and Welchol). Our FY17 EPS

increases by 3% due to the Shionogi product acquisition in Japan. Our target price declines

to Rs1,450 and is based on 20x FY18 EPS where we value Fortamet at 10x PE and base

business at 22x FY18 EPS. Risks (1) no further competition in Fortamet till patent expiry in

Mar-2021 (2) faster approvals from Goa facility before FY18.

Stock is pricing in Goa clearance but no hit to

Fortamet

Lupin stock is up ~10% in the past one month and is now factoring in Goa clearance (post

EIR and tentative approval from Goa facility). Lupin is trading at 25x one-year forward P/E

(above past five-year average P/E of 22x) and is valuing Fortamet profits at high multiple

despite a high possibility of Mylan and Nostrum entering Fortamet before patent expiry.

Figure 18: Lupin is trading at higher than last five-year fwd P/E range, despite impending

risks and lower growth trajectory

0x

5x

10x

15x

20x

25x

30x

35x

Aug-11 Mar-12 Oct-12 May-13 Dec-13 Jul-14 Feb-15 Sep-15 Apr-16

Lupin 1 yr fwd PE Lupin last 5 year Avg PE

Source: I/B/E/S, Credit Suisse estimates

Downgrade to UNDERPERFORM; cut TP to Rs1,450

We cut our FY18 EPS by 16% as we factor in competition in Fortamet. Our FY18

estimates include full contribution of Renagel, Renvela, Welchol (Goa resolution) &

continued exclusivity on Minastrin beyond six months. There could be downside risks to

our number if there is delay in approval due to Goa clearance or product specific delay

(Renagel, Revvle and Welchol have been delayed since FY15). Our FY17 EPS increases

by 3% due to the Shionogi product acquisition in Japan. Our target price falls to Rs1,450

(20x FY18) and we downgrade the stock to an UNDERPERFORM.

We value base business at

22x FY18 EPS while

Fortamet profits at 10x FY18

profits

We build full contribution

from Goa facility in FY18

with contribution included

from Renagel, Renvela and

Welchol. We also include

extended exclusivity on

Minastrin beyond six months

03 August 2016

Lupin


Lupin's R&D is higher than peers…

Lupin is under a significant investment mode with high capex (expected to remain

>$180mn) and higher R&D spend then peers (12-15% of sales). Lupin is expected to

spend more than $50mn in inhaler clinical trials for one MDI in US (Albeuterol) and two

DPIs and also undertake biosimilar trials (Etanercept Ph III).

Figure 19: Lupin is increasing R&D spend… Figure 20: …and is higher than peers (avg of 9% of sales)

0%

2%

4%

6%

8%

10%

12%

14%

-

50

100

150

200

250

300

350

400

450

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

R&D ($mn) As a % of sales (RHS)

0%

2%

4%

6%

8%

10%

12%

14%

Lupin DRL Glenmark Sun Cadila Cipla

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

…which we reward by higher base business multiple

We have given Lupin full benefit of higher R&D by assigning higher multiple of 22x FY18

to its base business – 10% higher than peers. We value Fortamet at a lower multiple of

10x as Fortamet sales are expected to decline with more competition.

03 August 2016

Lupin


Lupin LUPN.BO / LPC IN Price (02 Aug 16): Rs1,704.35, Rating:: UNDERPERFORM, Target Price: Rs1,450.00, Analyst: Anubhav Aggarwal

Target price scenario

Scenario TP %Up/Dwn Assumptions

Upside

Central Case 1,450.00 (14.92) 22x PE on FY17 earnings (average multiple for the sector)

Downside

Key earnings drivers 3/16A 3/17E 3/18E 3/19E

Revenue growth (%) 11.3 30.7 14.9 12.0 Domestic Formulations growth (%)

14.3 14.4 17.0 17.0 EBITDA Margins (%) 26.4 28.1 25.3 24.9 — — — — — — — —

Income statement (Rs mn) 3/16A 3/17E 3/18E 3/19E

Sales revenue 142,085 185,669 213,347 238,932 Cost of goods sold 43,094 51,604 60,804 68,096 SG&A 9,288 13,119 15,924 17,647 Other operating exp./(inc.) 52,168 68,791 82,666 93,728 EBITDA 37,534 52,155 53,953 59,461 Depreciation & amortisation 5,224 8,603 11,110 11,610 EBIT 32,310 43,552 42,842 47,851 Net interest expense/(inc.) (73.5) (73.5) (73.5) (73.5) Non-operating inc./(exp.) 1,357 1,508 2,306 2,950 Associates/JV — — — — Recurring PBT 33,741 45,133 45,222 50,874 Exceptionals/extraordinaries — — — — Taxes 11,536 12,637 12,662 14,245 Profit after tax 22,205 32,496 32,560 36,630 Other after tax income — — — — Minority interests 87.6 — — — Preferred dividends — — — — Reported net profit 22,118 32,496 32,560 36,630 Analyst adjustments — — — — Net profit (Credit Suisse) 22,118 32,496 32,560 36,630

Cash flow (Rs mn) 3/16A 3/17E 3/18E 3/19E

EBIT 32,310 43,552 42,842 47,851 Net interest — — — — Tax paid — — — — Working capital (34,008) (14,049) (11,736) (10,849) Other cash & non-cash items (4,968) (2,453) 828 389 Operating cash flow (6,666) 27,050 31,935 37,391 Capex (71,806) (20,910) (12,000) (12,000) Free cash flow to the firm (78,472) 6,140 19,935 25,391 Disposals of fixed assets — — — — Acquisitions — — — — Divestments — — — — Associate investments — — — — Other investment/(outflows) 9.1 — — — Investing cash flow (71,797) (20,910) (12,000) (12,000) Equity raised 2,368 (4) — — Dividends paid (3,382) (4,762) (4,772) (5,368) Net borrowings 66,424 — — — Other financing cash flow 79.8 — — — Financing cash flow 65,490 (4,767) (4,772) (5,368) Total cash flow (12,973) 1,374 15,163 20,023 Adjustments — — — — Net change in cash (12,973) 1,374 15,163 20,023

Balance sheet (Rs mn) 3/16A 3/17E 3/18E 3/19E

Cash & cash equivalents 8,399 9,773 24,936 44,959 Current receivables 45,498 59,455 68,317 76,510 Inventories 31,787 41,538 47,730 53,454 Other current assets 21,809 22,707 26,092 29,221 Current assets 107,493 133,472 167,075 204,144 Property, plant & equip. 59,625 49,855 53,133 55,911 Investments 55.2 55.2 55.2 55.2 Intangibles 56,398 78,475 76,087 73,698 Other non-current assets 806.0 806.0 806.0 806.0 Total assets 224,378 262,664 297,156 334,615 Accounts payable 21,918 28,642 32,912 36,859 Short-term debt 18,036 18,036 18,036 18,036 Current provisions — — — — Other current liabilities 12,497 16,331 18,765 21,015 Current liabilities 52,452 63,009 69,713 75,910 Long-term debt 53,739 53,739 53,739 53,739 Non-current provisions — — — — Other non-current liab. 8,022 8,022 8,022 8,022 Total liabilities 114,213 124,770 131,474 137,671 Shareholders' equity 109,844 137,573 165,361 196,623 Minority interests 320.8 320.8 320.8 320.8 Total liabilities & equity 224,378 262,664 297,156 334,615

Per share data 3/16A 3/17E 3/18E 3/19E

Shares (wtd avg.) (mn) 448.4 448.4 448.4 448.4 EPS (Credit Suisse) (Rs) 49.3 72.5 72.6 81.7 DPS (Rs) 7.5 10.6 10.6 12.0 BVPS (Rs) 245 307 369 438 Operating CFPS (Rs) (14.9) 60.3 71.2 83.4

Key ratios and valuation

3/16A 3/17E 3/18E 3/19E

Growth(%) Sales revenue 11.3 30.7 14.9 12.0 EBIT 1.4 34.8 (1.6) 11.7 Net profit (8.0) 46.9 0.2 12.5 EPS (8.0) 46.9 0.2 12.5 Margins (%) EBITDA 26.4 28.1 25.3 24.9 EBIT 22.7 23.5 20.1 20.0 Pre-tax profit 23.7 24.3 21.2 21.3 Net profit 15.6 17.5 15.3 15.3 Valuation metrics (x) P/E 34.6 23.5 23.5 20.9 P/B 6.96 5.56 4.62 3.89 Dividend yield (%) 0.44 0.62 0.62 0.70 P/CF (115) 28 24 20 EV/sales 5.86 4.47 3.82 3.33 EV/EBITDA 22.2 15.9 15.1 13.4 EV/EBIT 25.8 19.1 19.0 16.6 ROE analysis (%) ROE 22.3 26.3 21.5 20.2 ROIC 17.3 16.8 15.0 15.8 Asset turnover (x) 0.63 0.71 0.72 0.71 Interest burden (x) 1.04 1.04 1.06 1.06 Tax burden (x) 0.66 0.72 0.72 0.72 Financial leverage (x) 2.04 1.90 1.79 1.70 Credit ratios Net debt/equity (%) 57.5 45.0 28.3 13.6 Net debt/EBITDA (x) 1.69 1.19 0.87 0.45 Interest cover (x) (440) (593) (583) (651)

Source: Company data, Thomson Reuters, Credit Suisse estimates.

0

5

10

15

20

25

30

35

2011 2012 2013 2014 2015 2016

12MF P/E multiple

0

1

2

3

4

5

6

7

8

9

2011 2012 2013 2014 2015 2016

12MF P/B multiple

Source: IBES

03 August 2016

Lupin


Companies Mentioned (Price as of 02-Aug-2016)

Ajanta Pharma (AJPH.NS, Rs1825.1) Akorn (AKRX.OQ, $32.89) Alembic Pharma (ALEM.BO, Rs623.15) Alkem (ALKE.NS, Rs1559.7) Allergan Plc. (AGN.N, $250.75) Aspen Pharmacare Holdings Ltd (APNJ.J, R369.6) Aurobindo Pharma Ltd (ARBN.BO, Rs765.2) Biocon (BION.BO, Rs829.25) Cadila Healthcare (CADI.BO, Rs347.75) Cipla Limited (CIPL.BO, Rs518.6) Divi's (DIVI.BO, Rs1181.1) Dr. Reddy's Laboratories Limited (REDY.BO, Rs2977.4) Gedeon Richter (GDRB.BU, Ft5817.0) Glenmark Pharmaceuticals (GLEN.BO, Rs842.25) Hikma Pharmaceuticals Plc (HIK.L, 2672.0p) Hospira Inc (HSP.N, $89.95) IPCA Laboratories Limited (IPCA.BO, Rs512.1) Impax Laboratories, Inc (IPXL.OQ, $30.97) Indoco Remedies (INRM.NS, Rs310.65) Lupin Ltd (LUPN.BO, Rs1704.35, UNDERPERFORM, TP Rs1450.0) Mylan Inc. (MYL.OQ, $46.53) Natco Pharma (NATP.NS, Rs602.7) Perrigo Company plc (PRGO.N, $91.61) Sagent Pharm (SGNT.OQ, $21.74) Shionogi (4507.T, ¥5,443) Sun Pharmaceuticals Industries Limited (SUN.BO, Rs828.75) Taro Pharmaceutical Industries Ltd (TARO.N, $139.97) Teva Pharmaceutical Industries Ltd. (TEVA.N, $52.96) Torrent Pharma (TORP.BO, Rs1479.8)

Disclosure Appendix

Important Global Disclosures

Anubhav Aggarwal and Chunky Shah each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Lupin Ltd (LUPN.BO)

LUPN.BO Closing Price Target Price

Date (Rs) (Rs) Rating

08-Aug-13 801.15 830.00 N

31-Oct-13 887.15 950.00

10-Dec-13 872.45 1025.00 O

28-Oct-14 1357.65 1560.00

03-Feb-15 1545.30 1780.00

11-May-15 1770.15 1585.00 N

27-Jul-15 1617.50 1735.00

26-Aug-15 1811.80 1770.00

23-Sep-15 1921.30 2250.00 O

27-Oct-15 1945.65 2150.00

20-May-16 1505.15 1905.00

* Asterisk signifies initiation or assumption of coverage.

N EU T RA L

O U T PERFO RM

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European rat ings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings

03 August 2016

Lupin


are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 201 2 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the rela tive attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Not Rated : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time.

Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sec tor. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 53% (45% banking clients)

Neutral/Hold* 31% (13% banking clients)

Underperform/Sell* 15% (33% banking clients)

Restricted 1%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relati ve basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objec tives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

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Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Lupin Ltd (LUPN.BO)

Method: Our Rs1,450 target price for Lupin is arrived at by applying 20x price-to-earnings multiple to its profits for FY18. The price-to-earnings multiple used for Lupin is in line with the sector average multiple for large caps. Our UNDERPERFORM rating is based on high profit concentration, and expensive valuations

Risk: Upside risks to our Rs1,450 target price and UNDERPERFORM rating for Lupin include: (1) delayed competition in Fortamet; (2) faster than expected new product approvals in the United States; (3) less competition in Minastrin for more than a year; and (4) better than expected ramp-up in Gavis portfolio

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

03 August 2016

Lupin


The subject company (ARBN.BO, TEVA.N, CIPL.BO) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided investment banking services to the subject company (TEVA.N) within the past 12 months.

Credit Suisse provided non-investment banking services to the subject company (ARBN.BO, TEVA.N) within the past 12 months

Credit Suisse has managed or co-managed a public offering of securities for the subject company (TEVA.N) within the past 12 months.

Credit Suisse has received investment banking related compensation from the subject company (TEVA.N) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (LUPN.BO, ARBN.BO, TEVA.N, SUN.BO, CIPL.BO, GLEN.BO, 4507.T) within the next 3 months.

Credit Suisse has received compensation for products and services other than investment banking services from the subject company (ARBN.BO, TEVA.N) within the past 12 months

As of the date of this report, Credit Suisse makes a market in the following subject companies (TEVA.N, PRGO.N).

Please visit https://credit-suisse.com/in/researchdisclosure for additional disclosures mandated vide Securities And Exchange Board of India (Research Analysts) Regulations, 2014

Credit Suisse may have interest in (NATP.NS, INRM.NS, BION.BO, ALKE.NS, AJPH.NS, DIVI.BO, ALEM.BO, LUPN.BO, ARBN.BO, TARO.N, SUN.BO, REDY.BO, CIPL.BO, TORP.BO, IPCA.BO, GLEN.BO, CADI.BO)

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Important Regional Disclosures

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Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

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As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.

Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

This research report is authored by:

Credit Suisse Securities (India) Private Limited ................................................................................................ Anubhav Aggarwal ; Chunky Shah

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Credit Suisse Securities (India) Private Limited ................................................................................................ Anubhav Aggarwal ; Chunky Shah

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

https://rave.credit-suisse.com/disclosures/view/report?i=241791&v=-4caxmmw7ry1gaf28mizjfy1b9

03 August 2016

Lupin


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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments.

When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

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