Why Lupin Share Price is Falling

When a balloon is filled with air, it inflates and flies high. But the moment something sharp pokes the balloon, all the air comes out and the balloon bites the dust.

Now consider this analogy for share markets.

The balloon (share markets) was flying high in the air because of easy liquidity. But the sharp needle (tightening liquidity by central banks among other reasons) poked the balloon and it came crashing down.

In the market turmoil, even defensive sectors like FMCG and pharma were not spared. Some of the best FMCG stocks and best pharma stocks were severely affected.

During Covid-19, pharma stocks were on the rise. They saw a meteoric rise as revenues and profits got a boost from people's increased spending on healthcare.

However, as the world is moving out from the covid-19 phase, the hype around pharma stocks is coming down.

One of the top pharma companies in India is losing its shine and has fallen sharply.

In the last year, Lupin's share price fell by 29%.

Let's understand why this could have happened.

#1 Kamal K Sharma steps down

In the past five days, Lupin share price has fallen over 8%. This recent decline could be due to managerial change.

Allow us to explain...

Some people are like a pillar. They can hold the weight of the entire building on their firm shoulders of vision and determination.

But when that person moves out, the entire building is shaken.

Kamal K Sharma was that pillar person for Lupin. He was part of Lupin's senior management team for over three decades. Sharma helped set up the company's vision, corporate strategy, and even mentored the management.

Recently, it was announced that Kamal K Sharma is stepping down from the Board of Directors effective 14 October 2022.

#2 Regulatory concerns

For pharma companies, there is no risk bigger than the regulatory risk. Their inability to come clean on the US food and drug administration (USFDA) checks has a huge impact on their growth certainty.

This has led to the sector becoming one of the most hated among investors.

Lupin is also threatened by the same risk. Late in September 2022, it received a warning letter from the USFDA for its manufacturing facility based in Tarapur. After inspecting the facility from 22 March 2022 to 4 April 2022, the USFDA issued a warning letter on 29 September 2022.

A warning letter is issued when a drug manufacturer has significantly violated the regulations regarding the manufacturing process and mentioned incorrect directions for use or made false claims about what a product can do.

#3 Recalling drugs

When a manufacturer has to call back its products, it creates a negative impact. It is not just a monetary loss but a loss of reputation.

This loss has had some impact on pharma companies since their products directly impact the health of individuals.

Last month, Lupin recalled 7,872 bottles of Rifampin Capsules, a medication used to treat infections caused by bacteria.

The drug was recalled because there were deviations in the current good manufacturing process.

#4 FII Selling

Interest rates are rising in developed markets like the USA. This makes the emerging markets less attractive for FIIs because the risk-free rate of return reduces.

Hence FIIs sell their holdings in companies operating in emerging markets like India to return to the safety of dollars. The same has happened with Lupin.

FIIs have been divesting their stake in Lupin since June 2021. FII's stake stood at 18.6% in the quarter ending June 2021. The stake was reduced to 14.3% by the end of the June 2022 quarter. This stake sale by FIIs added insult to injury.

Apart from FIIs, even promoters are divesting their stake in Lupin, but in very small amounts.

For more details, check out Lupin's latest shareholding pattern.

#5 Poor Financials

Another major sign of concern for Lupin is weak financials. Beginning from sales to profits, all the numbers have been quite volatile.

A negative profit margin of 9.1% is alarmingly low. Take a look at the table below which shows to what extent the company's operating profit has fallen.

Financial Snapshot

Particulars (Rs in m)	FY18	FY19	FY20	FY21	FY22
Total Income	159,545.00	170,843.80	173,203.20	152,992.50	166,191.50
Growth	-9.40%	7.10%	1.40%	-11.70%	8.60%
Operating profit	32,978.60	30,019.40	29,581.10	27,031.70	4,289.10
Operating profit margin	20.70%	17.60%	17.10%	17.70%	2.60%
Net profit	2,548.30	6,117.30	-2,737.20	12,266.00	-15,097.20
Net profit margin	1.60%	3.60%	-1.60%	8.00%	-9.10%

Data Source: Ace Equity

The company has also been facing headwinds in the US market on account of fewer limited competition launches, weak performance of speciality products, and price erosion.

Investment Takeaway

It looks like in the near term, Lupin is in for a rough ride.

In its March 2022 concall, Lupin's management said it will focus on optimising operating expenses, ensuring the evolution of complex generic medicines, and doubling down on markets like India.

For India, the management had guided for double digit organic growth in domestic formulations.

For the US, it has indicated at launching Suprep in the September 2022 quarter and the likes of Spiriva later in the financial year 2023. The launch of Pegflgrastim is most likely to follow in the financial year 2024.

Lupin has guided for Rs 5-10 bn in savings aided by multiple cost optimisation expenses. It intends to shift freight from air to ocean which will aid savings.

Before leaving, we recommend you to watch the below video where Chartist Brijesh Bhatia explains why this is the right time to buy pharma sector stocks.

About Lupin

Lupin is a leading pharmaceutical company from India and is among the top 10 generic companies in the world.

It started its business in 1968 and over the years has become one of the largest pharmaceutical companies in India and the world. Its businesses include formulations, APIs, drug delivery systems, and biotechnology.

To know more, you can check out Lupin's factsheet and quarterly results.

You can also compare Lupin with its peers:

Lupin vs Cipla

Lupin vs Sun Pharma

Lupin vs Zydus Lifesciences

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...