Event Update - Pharmaceuticals - Lupin - Elara Capital

• Lupin
• Rating: Accumulate
• Target Price: INR433
• Upside: 6%
• CMP: INR408 (as on 7 April 2011)

Lupin expands R&D pact with Salix

Salix to pay USD10mn upfront for global rights of rifaximin

Salix has expanded its R&D deal with Lupin for acquiring global rights of extended release version of rifaximin. Lupin would receive USD10mn upfront payment and potential milestones (on approval from regulators) from Salix Pharmaceuticals. Lupin with its patented bio-adhesive technology has developed an improved version of once-a-daily dosage of rifaximin tablets.

Rifaximin addresses gastrointestinal infection

Rifaximin is an orally administered rifamycin based non-systemic antibiotic. Its semi-synthetic feature allows smaller parts of the drug to pass through the gastrointestinal (GI) wall into circulation. It is used in the treatment of traveler's diarrhoea and hepatic encephalopathy. Due to the rarity of the disease, rifaximin has received orphan drug status from the US FDA in 1998. The drug with its brand name Xifaxan is currently available at 200mg and 500mg tablets. Being an extended-release (XR) form, Lupin's technology would increase the duration of the drug's stay in GI tract, decreasing the frequency of the intake.

Salix R&D deal to be beneficial in medium to long term

Lupin's opportunities in supplying API to Salix Pharma are still years away as the existing rifaximin's strengths are not included in the deal. The new form of rifaximin would be jointly developed by Lupin and Salix Pharma, and the milestone would be triggered by the approval from the US regulator. Previously, Lupin had out licensed its bio—adhesive technology to develop XR version of rifaximin in September 2009. Lupin had received USD5mn in upfront payment while potential milestones and royalties would be available once Salix receives approvals for commercialisiation in the US. With the extension of the deal, Lupin would also receive an additional USD10mn upfront along with royalties and additional contract of for supplying finished dosages of XR form of rifaximin.

Too early to build in expectation into earnings

While the opportunity for milestone payments and royalties at low-teen rate is buoyant, we expect Lupin to accrue more benefits from the commercialization of the drug in the medium to long term. Lupin and Salix might require at least 2-3 years for fully developing the drug for submission to regulatory approvals with the former receiving quarterly reimbursement of development costs from Salix. However, we consider such revenues - from the R&D deal before the commercialisation - as one-offs as the earnings visibility from supply contracts would be some years away. We upgrade our recommendation to Accumulate.

Source : Equity Bulls

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