New Drugs Tempt Lupin to Spend Up to $1 Billion: Corporate India

Lupin Ltd., the drugmaker founded by Indian billionaire Desh Bandhu Gupta, is seeking to acquire brands in the U.S. to expand its most profitable business, and may spend as much as $1 billion on a deal.

Lupin may buy a pediatric brand in the U.S. as well as a company that makes generic products such as oral contraceptives in Brazil, Managing Director Kamal Sharma said in an interview in Mumbai. The U.S. contributed 35 percent of Lupin’s sales in the year to March 31, according to data compiled by Bloomberg.

The company, which became the world’s biggest maker of formulations to treat tuberculosis by copying drugs, is adding to its portfolio of three patent-protected medicines after failing to prevent Mylan Inc. from selling a generic version of its cholesterol therapy Antara. Profit margins for branded treatments are double when compared with generics, according to Hitesh Mahida, an analyst at Fortune Equity Brokers (India) Ltd.

“Brands, unlike generics, give them more opportunity to venture into products where there’s less pricing competition,” said Sarabjit Kour Nangra, an analyst at Angel Broking Ltd. in Mumbai. “Branded products result in higher marketing, sales and legal costs, but equally they enjoy pricing power.”

Lupin, named after a leguminous flower, had 5 billion rupees ($92 million) of cash as of Sept. 30, and will borrow to fund acquisitions, Sharma said. The company will only make the purchase if it’s confident it can recoup the investment in five to seven years, he said. Sharma, 65, didn’t say if the company is in talks with any firm for an acquisition.

Share Performance

The drugmaker’s shares have risen 41-fold in the past decade, making it the third-best performer in the 40-company MSCI AC Asia Pacific Free/Health Care Index in the period. They rose 0.1 percent to 600.35 rupees in Mumbai.

Lupin’s 50.94 price-to-cash flow ratio is the highest among the world’s 34 largest generic drugmakers after Momenta Pharmaceuticals Inc., according to data compiled by Bloomberg. That compares with the 19.11 average for its peers. Forty-two analysts recommend buying the stock, one has a sell and 13 have a hold rating.

“At the current level, the price is justifiable,” said Bhagwan Singh Chaudhary, an analyst at India Nivesh Securities Pvt. in Mumbai, who has a hold rating on the stock. “The company will be able to maintain the top line growth, but when it will come to the operating side, it will be tough for them because of increasing research expenses and competition.”

A brand acquisition may help Lupin maintain margins. In 2009, it purchased the rights to Antara from the bankrupt Oscient Pharmaceuticals Corp. for $38.6 million and bought AllerNaze nasal spray from Collegium Pharmaceutical Inc.

Suprax Sales

Lupin started selling branded products in the U.S. in 2004 after acquiring the Suprax antibiotic from Pfizer Inc.’s Wyeth unit.

“Lupin did a good job with Suprax, but they haven’t really been able to replicate that anywhere else,” said Bino Pathiparampil, an analyst at IIFL Institutional Equities.

Lupin bolstered the Suprax brand by introducing it in forms such as tablets, chewable pills and oral drops, which are “likely to attract large potential pediatric prescriptions,” according to a note sent to clients on Feb. 22 by Manoj Garg, an analyst with Edelweiss Securities Ltd.

Antara will face generic competition after a U.S. court on Feb. 28 upheld a lower court ruling that Mylan didn’t infringe Lupin’s patents to the medicine, known by its active ingredient fenofibrate. The capsules in the 43-milligram and 130-milligram dosage forms had $60 million in sales in the 12 months ended Sept. 30, Canonsburg, Pennsylvania-based Mylan said Feb. 25, citing researcher IMS Health.

‘Future Profitability’

“Revenue from Antara will fall, and to bridge that and to maintain future profitability, they’re aggressively looking for brands now,” said Praful Bohra, an analyst at Nirmal Bang Institutional Equities in Mumbai.

The company in July said it wants to purchase branded drugs to treat skin diseases and infections. An acquisition in Brazil and Mexico will help it tap the $45 billion Latin American market, Sharma said. Lupin hasn’t made any acquisition since 2011.

“We would look at brands that overlap with pediatric care and primary health care, because these are areas where we already have competence,” Lupin’s Sharma said.

Earnings margins before interest, taxes, depreciation and amortization for patent-protected, branded drugs average as much as 50 percent compared with 25 percent for generic products, according to Fortune Equity’s Mahida. Lupin reported an Ebitda margin of 22.16 percent in the three months ended Dec. 31.

Lupin, established in 1968 by Chairman Gupta, a masters-degree holder in chemistry, may report a 37 percent increase in profit for the year to March 31, according to the median estimate of 45 analysts compiled by Bloomberg.

“Brand extensions and launch of niche products are a saving grace,” said Ranvir Singh, an analyst with “These measures could help Lupin substantially mitigate the impact of competition in the U.S.”