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Will Mylan's move impact Lupin's revenues? - Views on News from Equitymaster
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  • Mar 23, 2013

    Will Mylan's move impact Lupin's revenues?

    It is a very well known fact that the entry of a company in any segment or class adds to the competition in the said market. This also results in a pricing war among the companies. The same rule applies to the pharma sector as well. Infact, the price erosion in this segment is much intense and takes place at a faster pace, for a given drug. That's not all. An entry of a new company in this sector for any particular drug weighs heavy on the revenues of the existing company in a much lesser time period in contrast to other sectors.

    Something similar is happening to the Indian pharma company Lupin. In a month's time, Mylan has hit two of Lupin's important drugs viz., Fortamet generics and Antara and this will impact the latter's revenues. Let's have a closer look.

    Mylan is one of the world's leading generics and specialty pharmaceutical companies, providing products to customers in approximately 150 countries and territories. It has presence in developed and emerging countries. Mylan is the second largest (by volume) generic company in the US.

    Mylan's stroke

    In February 2013, Mylan launched the generic version of Antara. This launch is most likely an at-risk launch, though there is still not much clarity on this.

    The other drug Fortamet too has been targeted by Mylan. Recently, Mylan entered into settlement with the innovator to sell the generic version of Fortamet in the US. As per the settlement (between innovator and Mylan), Mylan will start selling generic Fortamet from August 2013 onwards.

    Impact of Mylan's launch

    Antara: Antara is a branded drug sold in the US and an important product in Lupin's branded portfolio. As per the available data, Lupin generates annual revenues of US$ 60 m from the sale of this drug in the US. Though the EBITDA margin of this product is not known to us, we believe that this product is not margin accretive.

    The launch by Mylan is much ahead of time and thus is expected to impact Lupin's topline. It is also important to note that, Antara is a type of Fenofibrate. Fenofibrates are mainly used to treat disease pertaining to cardiovascular and used to reduce cholesterol levels in patients. Tricor is also a type of fenofibrate and is the largest selling drug (market size US$ 1 bn in US) in the fenofibrate group of drugs. The generics of Tricor have been available since the last few months; due to this Lupin's Antara was expected to face pressure in the upcoming period. The launch by Mylan will further hamper Lupin's sales; however the impact on bottom line is not expected to be much.

    Fortamet: Fortamet is a branded drug and sold by Shionogi and Andrx Pharma. Fortamet is a type of metformin and is indicated to manage sugar levels in patients with type II diabetes. The annual brand sale of the Fortamet brand is US$ 125 m. Some time back, Lupin had launched Fortamet generics at risk. Lupin is still under litigation with the innovator for making the launch before patent expiry and is the only generic company selling the generics of Fortamet.

    With the said settlement, Mylan will be the second generic company to launch this drug and this will impact Lupin's market share. Inspite of Mylan being the only player other than Lupin, yet the latter is expected to face decline in market share. This is because Lupin is selling its generics at risk. Now in case of an unfavorable verdict from the court, Lupin will have to pay damages incurred to the innovator for launching its generics. Therefore, generic companies launching the drugs at risk do not offer their drugs at very high discounts as normally done by the companies. The reason being, in case of any unfavorable verdict given to generic companies, their penalties are directly linked to the price erosion done by the generic company who has launched the drug at risk. Now as Mylan will enter the market it will sell its generics at much lower price in order to gain market share, as its launch is legal (launch is as per settlement). However, the same cannot be said for Lupin. Thus, this is likely to impact Lupin's market share and thus its sales.

    Our View

    As Mylan is among the stronger generic players in the US, its entry in two of the low competition drugs will certainly impact Lupin. While the impact on Antara will be visible from Q4FY13 onwards, the decline in revenues of Fortamet will come from 2QFY14 onwards. Thus unless Lupin ramps up its market share in other products or introduces new low competition products in the US, the decline in revenues in this segment is likely to impede the overall sales of the company.

      Bhavita Nagrani (Research Analyst) is a Chartered Financial Analyst (ICFAI) with nearly six years of experience in the field of equity research. She has a deep understanding of the global as well as the domestic Healthcare industry and keenly tracks the developments therein. When it comes to stock investing, she is a strong advocate of the bottom-up approach to stock picking and has a remarkable ability to discern nuances in the business models of companies belonging to the same industry. Bhavita is the contributor to our large cap franchise, StockSelect.



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