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Research
Buy Lupin - Sharekhan
Posted On : 2011-11-20 01:47:12( TIMEZONE : IST )
- Cluster: Apple Green
- Recommendation: Buy
- Price target: Rs538
- Current market price: Rs449
Lupin expands presence in Japan: Lupin is set to acquire I'rom Pharmaceutical Co (I'rom Pharma) through its Japanese subsidiary, Kyowa. The agreement has been reached between Kyowa and I'rom Holdings Co. Ltd (IH) to acquire up to 100% of the outstanding shares of its subsidiary, I'rom Pharma. With this acquisition, Lupin's revenue from Japan is expected to expand by 50% in FY2012. We expect Lupin's annual revenue to increase by 5% due to this acquisition (on an annualised basis).
$11-billion market opportunities: The market size for I'rom Pharma is estimated at $11 billion, which is approximately 10% of the Japanese pharmaceutical (pharma) market. I'rom Pharma generated $67.9 million worth revenue in FY20011 and is expected to reach $75 million by the end of FY2012. I'rom Pharma has strong presence in diagnosis procedure combination (DPC) hospitals in Japan, which is a fixed-rate treatment hospital segment in Japan, where the government mandates clinics to offer low-cost healthcare services. There are 1,400 DPC hospitals in Japan and I'rom Pharma covers 35% of all hospital beds nationwide.
Strategic fit for Lupin: Through this acquisition, Lupin would not only expand its presence in the Japanese market but also get better synergies through product alignments and integration. I'rom Pharma's product portfolio mainly consists of injectibles in the anti-infective, gastro-intestinal, cardiovascular and nutrition segments. This will help Lupin to fill the gap in its products pipeline, which mainly consists of oral products like tablets and capsules. Besides, Kyowa will also get help in clinical trials through site management expertise from I'rom Holdings (this agreement has been signed separately), which will help Kyowa to ramp up its product filings.
Valuation and view: Inorganic expansions have been one of key strategies for Lupin to grow at a faster pace. The acquisition of I'rom Pharma is a strategic move to expand its presence in Japan, which is the world's second largest pharma market. Japan is witnessing increased penetration of generic products, given the government's focus to contain healthcare costs through increased genericisation of the market. Through this acquisition, Kyowa will have control over the key distribution channels (hospitals), which will help fasten the introduction of newer products in the markets. Besides, the alliance with I'rom Pharma for clinical trial management would help Kyowa to get faster approvals in Japan, where the approval process is relatively stringent.
We expect this acquisition to be earnings accretive from the first year itself, which should grow faster over a period of time. We expect the revenue and profit after tax (PAT) to grow at compounded annual growth rate (CAGR) of 18% and 19% respectively over FY2011-13.
At the current market price, the stock is trading at 19.9x and 16.1x FY2012E and FY2013E earnings per share (EPS). We maintain our Buy recommendation on the stock with a revised price target of Rs538 (implies 19.6x FY2013E EPS).