Lupin - Credit Suisse
Transcript of Lupin - Credit Suisse
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
03 August 2016
Asia Pacific/India
Equity Research
Specialty Pharmaceuticals
Lupin
(LUPN.BO / LPC IN) DOWNGRADE RATING
High profit concentration risk; risk-reward
turns unfavourable now
■ Downgrade to UNDERPERFORM as high profit concentration risk is
not priced-in. In our view, the risk-reward is no longer favourable with the
stock pricing in upside from clearance of the Goa facility but not reflecting
high profit concentration risk with gFortamet accounting for 35-40% of FY17
profits. We reduce our estimates (FY18 EPS by 16%) as we factor in
Fortamet competition (Mylan and Nostrum could launch) and cut our TP to
Rs1,450 (from Rs1,905).
■ Only mid-single digit profit CAGR over next two years. As competition in
Fortamet enters, FY18 should be a year of no growth and next two-year profit
CAGR should be just mid-single digit. This is led by high profit concentration
with almost half of FY18 profits driven by three drugs (Fortamet, Glumetza and
Minastrin). Similar concentration for peers is lower (Sun: 20%, Dr. Reddy's:
35%). Our estimates assume full contribution from Renagel, Renvela, Welchol
(Goa resolution) and continued exclusivity on Minastrin.
■ Profitability to peak out in 1Q17 results. We expect 1Q17 results next
week to mark the peak quarter profitability for Lupin over next two years as
Glumetza exclusivity is now over and R&D expense should increase as
clinical trials for DPI Inhalers start in the US.
■ Low margin of safety as it is trading at high end of historical valuations.
Lupin is trading at high end of historical valuations at 23.5x FY18 EPS. Thus
margin of safety is low with high concentration risk. Our target price is based
on 20x FY18 EPS where we value Fortamet at 10x P/E and base business
at 22x FY18 EPS. Risks: (1) no further competition in Fortamet until patent
expiry in Mar-2021 (2) faster approvals from Goa facility before FY18.
Share price performance
80
130
180
1000
1500
2000
Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16
Price (LHS) Rebased Rel (RHS)
The price relative chart measures performance against the S&P
BSE SENSEX IDX which closed at 27748.14 on 02/08/16
On 02/08/16 the spot exchange rate was Rs66.94/US$1
Performance over 1M 3M 12M Absolute (%) 8.9 6.2 3.7 — Relative (%) 7.2 -3.7 4.8 —
Financial and valuation metrics
Year 3/16A 3/17E 3/18E 3/19E Revenue (Rs mn) 142,084.7 185,669.0 213,346.6 238,931.9 EBITDA (Rs mn) 37,534.5 52,155.1 53,952.8 59,461.0 EBIT (Rs mn) 32,310.2 43,551.7 42,842.4 47,850.6 Net profit (Rs mn) 22,117.6 32,495.7 32,560.0 36,629.6 EPS (CS adj.) (Rs) 49.3 72.5 72.6 81.7 Change from previous EPS (%) n.a. 3.4 -16.1 Consensus EPS (Rs) n.a. 65.7 78.0 90.2 EPS growth (%) -8.0 46.9 0.2 12.5 P/E (x) 34.6 23.5 23.5 20.9 Dividend yield (%) 0.44 0.62 0.62 0.70 EV/EBITDA (x) 22.2 15.9 15.1 13.4 P/B (x) 7.0 5.6 4.6 3.9 ROE (%) 22.3 26.3 21.5 20.2 Net debt/equity (%) 57.5 45.0 28.3 13.6
Source: Company data, Thomson Reuters, Credit Suisse estimates.
Rating (from Outperform) UNDERPERFORM*
Price (02 Aug 16, Rs) 1,704.35 Target price (Rs) (from 1,905.00) 1,450.00¹ Upside/downside (%) -14.9 Mkt cap (Rs mn) 768,630 (US$ 11,483) Enterprise value (Rs mn) 830,632 Number of shares (mn) 450.98 Free float (%) 47.0 52-week price range 2,107.0 - 1,401.4 ADTO - 6M (US$ mn) 44.5
*Stock ratings are relative to the coverage universe in each
analyst's or each team's respective sector.
¹Target price is for 12 months.
Research Analysts
Anubhav Aggarwal
91 22 6777 3808
Chunky Shah
91 22 6777 3872
03 August 2016
Lupin
(LUPN.BO / LPC IN) 2
Focus charts and tables Figure 1: Product concentration for Lupin is the highest
(even after building-in competition in Fortamet in FY18)
Figure 2: Fortamet and Glumetza accounts for almost half
of current US sales
0%
10%
20%
30%
40%
50%
Lupin Dr. Reddy's Sun
% FY18 eps contribution from top 3 pdts
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50
100
150
200
250
300
350
1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16
Lupin US quarterly sales
Base sales Fortamet Glumetza$ mn
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 3: Mylan & Nostrum have settled litigation on Fortamet and could enter before patent expiry
Date Event
15-Jan-09 Lupin sued on Fortamet
18-Feb-10 Mylan sued on Fortamet
13-Jul-12 Nostrum sued on Fortamet
13-Mar-13 Mylan settles on Fortamet to launch on 1-Aug-2013
3-May-13 Nostrum settles for launch before patent expiry in Mar-2021 - approval awaited from FDA
13-Jun-13 Lupin settles on the litigation and launches
20-Mar-18 6,099,859 patent on Fortamet expiries
17-Mar-21 6,866,866 patent on Fortamet expiries
Source: Company data, Credit Suisse research
Figure 4: Expect no profit growth in FY18 and only 12% in FY19 due to hit in Fortamet
FY17E FY18E FY19E
Total EPS 72 73 82
Fortamet 31 15 10
Glumetza 16 9 9
Minastrin 3 11 4
Renvela+Renagel+Welchol - 9 10
Base EPS pre R&D 60 74 92
R&D 37 44 45
Total EPS growth 47% 0% 12%
Base EPS growth (pre R&D) 17% 23% 25%
Source: Company data, Credit Suisse estimates
Figure 5: Gavis ramp-up has been slower than expected
so far
Figure 6: Lupin is trading at high end of historical
valuations and thus low margin of safety
10
15
20
25
30
35
Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16
Gavis Trailing 3-month sales ($mn)
0x
5x
10x
15x
20x
25x
30x
35x
Aug-11 Mar-12 Oct-12 May-13 Dec-13 Jul-14 Feb-15 Sep-15 Apr-16
Lupin 1 yr fwd PE Lupin last 5 year Avg PE
Source: IMS Health, Credit Suisse research Source: I/B/E/S estimates, Credit Suisse research
03 August 2016
Lupin
(LUPN.BO / LPC IN) 3
High profit concentration risk; risk-reward turns unfavourable now Profit concentration risk higher in Lupin vs peers
Profit concentration for Lupin has increased significantly post price increase taken by
Lupin in Fortamet in Sep-2015 and Glumetza market size increasing many folds after
Valeant implemented price increase in July-2015. Currently, both these products account
for almost half of the US sales for Lupin. Glumetza exclusivity has now expired and with
Sun and Actavis both getting approval, there is no further positive surprise on Glumetza.
However, the market is still ignoring very high profit concentration in Fortamet which
accounts for 35-40% of FY17 profits for Lupin. Both Mylan and Nostrum have settled with
the Innovator to launch before the patent expiry and given Fortamet's market size has now
increased to 3x, the incentive is higher for Mylan to launch now.
In comparison to peers, profit concentration is much higher for Lupin with top 3 drugs
(Fortamet, Glumetza and Minastrin) accounting for almost half of consolidated FY18
profits. In comparison, profit concentration is lower for peers with top three drugs (Absorica,
Gleevec, Doxil) contributing about 20% to Sun's FY18 profits while Dr. Reddy's gets 35%
of profits from top three drugs (Decitabine, Metoprolol, Sumatriptan).
Expect mid-single digit EPS CAGR over next two years
Lupin should be a beneficiary of faster approvals in the US with strong pipeline of 163
pending ANDAs (as of 31-Mar-2016). Therefore we build in strong base business growth of
20%+CAGR over next three years for Lupin. This also includes full contribution from
resolution of the Goa plant (and hence inclusion of key products namely Renagel, Renvela
and Welchol). However, we expect overall profit growth to be weak due to high contribution
of few products where we expect more competition. We build in Fortamet competition in
FY18 which neutralises the impact of base business growth and further hit to Minastrin in
FY19 leads to overall profit growth to be low at mid-single digit CAGR over next two years.
Our estimates also include positive benefit of recent acquisition of 21 products in Japan
which is EPS accretive (FY17 EPS up by 3%) but in our view pay-back period is longer at
more than seven years given these are off patent products and there will be both volume
loss (generics taking away market share) and price cut (bi-annual price cut).
On the base business, Gavis acquisition ramp-up so far has been slower than expected
with 1Q17 IMS sales for Gavis showing 3% decline QoQ even adjusted for branded
Methergine which now is launched under Lupin label. We note that this is early integration
period for Lupin as Gavis was acquired only in Feb-2016.
Downgrade to UNDERPERFORM (from Outperform)
We turn cautious on Lupin as the risk-reward is no longer favourable with the stock pricing in
clearance of Goa facility (in-line with our views) but at the same time not reflecting high risk
from incremental competition in gFortamet. The stock is trading at 23x FY18 EPS and is
valuing Fortamet profits at high multiple despite a high possibility of Mylan and Nostrum
entering Fortamet before patent expiry (Mar-2018 and Mar-2021). We cut our FY18 EPS by
16% as we factor in competition in Fortamet. Our FY18 estimates include full contribution of
Renagel, Renvela, Welchol (Goa resolution) and continued exclusivity on Minastrin beyond
six months. There could be downside risks to our number if there is delay in approval due to
Goa clearance or product specific delay (Renagel, Renvela and Welchol). Our FY17 EPS
increases by 3% due to the Shionogi product acquisition in Japan. Our target price declines
to Rs1,450 (from Rs1,905) and is based on 20x FY18 EPS where we value Fortamet at 10x
P/E and base business at 22x FY18 EPS. Risks: (1) no further competition in Fortamet till
patent expiry in Mar-2021 (2) faster approvals from Goa facility before FY18.
Fortamet market size has
increased to 3x now and it
offers high incentive for
Mylan to pursue Fortamet
generic opportunity again
Profit concentration at Lupin
is higher than peers with top
3 drugs accounting for half
of FY18 profits (Sun: 205
and DRL at 35%)
We expect strong base
business growth of 20%+
CAGR over next three years
but due to high
concentration and hit to
Fortamet profits we expect
overall profit growth to be
weak
We value base business at
22x FY18 EPS while
Fortamet profits at 10x FY18
profits
We build full contribution
from Goa facility in FY18
with contribution included
from Renagel, Renvela and
Welchol. We also include
extended exclusivity on
Minastrin beyond six months
03 August 2016
Lupin
(LUPN.BO / LPC IN) 4
Global pharma valuation table Figure 7: Valuation comparison of Indian pharma companies
2 Aug 2016 M cap
(US$
mn)
CMP Rating TP Upside/
(down-
side)
(%)
Sales ($ mn) EBITDA
margin (%)
EPS
growth
(%)
P/E
(x)
P/B
(x)
RoE
(%)
EV/EBITDA
(x)
FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18
India
Sun 29,797 829 O 880 6 6,531 6,357 34.2 35.5 42 20 26.0 21.7 5.3 4.4 20 20 18.2 14.6
Lupin 11,396 1,704 U 1,450 -15 3,915 3,955 28.1 25.3 47 0 23.5 23.5 5.6 4.6 24 20 15.8 15.0
Dr. Reddy's 7,318 2,977 U 2,750 -8 3,068 3,101 17.5 22.5 -23 50 32.6 21.7 4.0 3.4 12 16 19.0 12.6
Cipla 6,221 519 O 565 9 3,363 3,393 17.0 17.9 6 27 26.0 20.4 3.1 2.7 12 13 16.7 13.6
Aurobindo 6,676 765 O 950 24 3,293 3,292 23.7 24.8 25 20 17.5 14.6 3.7 3.0 21 20 13.1 10.5
Cadila 5,320 348 O 405 16 2,190 2,292 19.8 21.1 4 32 22.6 17.1 5.5 4.4 24 26 18.1 13.6
Torrent 3,742 1,480 O 1,500 1 1,289 1,283 26.0 25.7 -35 14 22.4 19.6 6.0 4.9 27 25 16.4 13.8
Glenmark 3,397 842 N 840 0 1,836 1,916 21.7 22.1 48 26 22.2 17.7 4.5 3.6 20 21 13.7 11.1
Strides 1,527 1,144 O 1,420 24 947 938 19.8 20.6 111 27 18.3 14.5 3.0 2.5 16 17 13.7 11.2
IPCA 968 512 O 640 25 689 705 17.4 19.1 86 36 20.5 15.1 2.5 2.2 12 15 12.8 10.2
India: Not Covered
Alembic 1,755 623 478 558 19 22 -41 36 27.2 20.3 5.9 5.1 26 27 20.3 15.2
Ajanta 2,397 1,823 313 370 34 34 21 22 33.2 27.1 10.1 7.9 34 31 22.8 19.2
Indoco 430 313 175 211 18 20 45 37 23.6 17.4 4.2 3.5 19 22 13.5 10.2
Natco 1,582 608 238 279 29 28 103 15 33.5 29.1 7.1 5.8 22 20 22.8 20.2
Global Generics: US
Actavis 99,186 251 16,714 18,231 49 51 12 19 17.7 14.3 1.1 1.1 7 9 17.3 15.3
Teva 48,409 53 22,344 25,308 36 37 16 19 10.0 8.8 1.6 1.5 14 16 6.4 5.4
Mylan 23,654 47 10,902 13,200 33 34 20 24 9.4 8.0 2.5 2.2 23 30 9.5 7.2
Perrigo 13,121 92 5,952 6,305 32 31 10 8 10.1 9.3 1.2 1.1 10 13 9.4 9.2
Taro 5,995 140 1,000 950 65 65 -1 -5 10.9 11.3 2.4 1.9 22 17 9.2 9.7
Akorn 3,928 33 1,075 1,158 45 46 6 11 15.3 13.9 4.7 3.6 32 28 9.5 8.7
Impax Labs 2,286 31 994 1,157 25 30 22 47 17.5 12.1 2.2 1.9 11 17 10.3 7.2
Global Generics – Non US
Aspen 12,015 370 3,170 3,313 29 30 35 12 21.3 17.8 3.8 3.2 20 20 15.2 14.2
Hikma 8,534 2,672 2,054 2,479 23 28 -26 76 36.7 22.1 3.1 2.7 10 13 17.9 11.9 Richter Gedeon 3,904 5,817 1,339 1,467 23 25 -11 23 22.4 17.9 1.7 1.6 8 9 11.5 10.0
Note: O = Outperform, N = Neutral, Not Covered : Credit Suisse Equity Research does not provide ongoing
coverage of the company or offer an investment rating or investment view on the equity security of the
company or related products.
Source: IBES for Not Covered companies, Credit Suisse estimates for others
03 August 2016
Lupin
(LUPN.BO / LPC IN) 5
Profit concentration risk higher in Lupin versus peers Profit concentration for Lupin has increased significantly post price increase taken by
Lupin in Fortamet in Sep-2015 and Glumetza market size increasing many folds after
Valeant implemented price increase in July-2015. Currently both these products account
for almost half of US sales for Lupin. Glumetza exclusivity has now expired and with Sun
and Actavis both getting approval, there is no further positive surprise on Glumetza.
However, the market is still ignoring very high profit concentration in Fortamet which
accounts for 35-40% of FY17 profits for Lupin. Both Mylan and Nostrum have settled with
the Innovator to launch before the patent expiry and given Fortamet's market size has now
increased to 3x, the incentive is higher for Mylan to launch now.
In comparison to peers, profit concentration is much higher for Lupin with top 3 drugs
(Fortamet, Glumetza and Minastrin) accounting for almost half of consolidated FY18
profits. In comparison, profit concentration is lower for peers with top three drugs (Absorica,
Gleevec, Doxil) contributing about 20% to Sun's FY18 profits while Dr. Reddy's get 35% of
profits from top three drugs (Decitabine, Metoprolol, Sumatriptan).
Almost half of current US sales are contributed by
Fortamet and Glumetza
Lupin's US quarterly sales run-rate has picked up from ~US$175 mn to US$325 mn in
4Q16 (Figure 8) largely driven by Fortamet price increase and Glumetza exclusivity.
Fortamet and Glumetza put together accounted for almost half of US sales for the Mar-16
quarter. The contribution for 1Q17 is also expected to remain high from these two drugs.
Figure 8: Glumetza and Fortamet key contributors for Lupin US sales
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50
100
150
200
250
300
350
1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16
Lupin US quarterly sales
Base sales Fortamet Glumetza$ mn
Source: Company data, Credit Suisse estimates
Glumetza: Sun and Actavis have got approvals; no positive surprise for Lupin here
Lupin was First to File on Glumetza and now new competition has started to enter
Glumetza. Sun and Actavis both have received approvals post the 180 days exclusivity
expiry. Sun is expected to launch over next few weeks. Therefore, 1Q17 should be the
peak quarter of profitability for Lupin over next two years.
Fortamet market size has
increased to 3x now and it
offers high incentive for
Mylan to pursue Fortamet
generic opportunity again
Profit concentration at Lupin
is higher than peers with top
3 drugs accounting for half
of FY18 profits (Sun: 205
and DRL at 35%)
03 August 2016
Lupin
(LUPN.BO / LPC IN) 6
Fortamet: Mylan and Nostrum have already settled with the Innovator
There are two main patents pending on Fortamet (1) '859 expires in Mar-2018 and (2) '866
expires in Mar-2021. Both Mylan and Nostrum have already settled on Fortamet litigation.
Nostrum settlement mentions that they can launch before Mar-2021 expiry whereas Mylan
settlement allowed them to launch post 1-Aug-2013. Given Fortamet drug size has
increased by 200% since then to almost ~$500mn now (Figure 11) (benefit of price
increase and volume gain from Pioglitazones), there is a strong incentive for Mylan to
pursue Fortamet application again (price increase in Fortamet happened in Sep-2015).
We are building in one of the two to launch in FY18. Currently, Fortamet is a two player
market with Lupin having 64% market share and Actavis is the other player.
Figure 9: Patents remaining on Fortamet
Patent Expiry Description
6,099,859 20-Mar-18 Controlled release oral tablet having a unitary core
6,866,866 17-Mar-21 Controlled release metformin compositions
Source: Company data, Credit Suisse research
Figure 10: Sequence of Events on Fortamet litigation
Date Event
15-Jan-09 Lupin sued on Fortamet
18-Feb-10 Mylan sued on Fortamet
13-Jul-12 Nostrum sued on Fortamet
13-Mar-13 Mylan settles on Fortamet to launch on 1-Aug-2013
3-May-13 Nostrum settles for launch before patent expiry in Mar-2021 - approval awaited from FDA
13-Jun-13 Lupin settles on the litigation and launches
Source: Company data, Credit Suisse research
Figure 11: Fortamet market size has gone up 2x post price increase
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200
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400
500
600
700
800
900
1,000
Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16
Fortamet IMS mkt size ($mn)
Source: IMS Health, Credit Suisse research
Profit concentration risk higher in Lupin versus peers
Fortamet alone contributes 40% of FY17 EPS for Lupin and even building-in incremental
competition in FY18, accounts for 20% of FY18 EPS. This is the largest contribution for a
single product across our coverage.
In terms of contribution of top 3 drugs of Lupin (Fortamet, Glumetza and Minastrin) to
FY18 profits, the concentration is much higher for Lupin compared to Sun (Absorica,
Gleevec, Doxil) and Dr. Reddy's (Decitabine, Metoprolol, Sumatriptan). Almost half of
Lupin's FY18 profits come from top 3 drugs in the US compared to one-third for Dr.
Reddy's and about 20% for Sun Pharma ( Figure 12)
03 August 2016
Lupin
(LUPN.BO / LPC IN) 7
Figure 12: Product concentration for Lupin is the highest among peers (even after
building-in competition in Fortamet)
0%
10%
20%
30%
40%
50%
Lupin Dr. Reddy's Sun
% FY18 eps contribution from top 3 pdts
Source: Company data, Credit Suisse estimates
Figure 13: Competitive profile in Lupin's top 3 products
Top 3 US pdts % of FY18 base EPS Competition threat
Fortamet 19% Mylan has approval; Nostrum has settled. Patent to expire in Mar-2018 and Mar-2021
Glumetza 13% Actavis and Sun have got approval; low competition post that
Minastrin 24 FE 14% Amneal and Mylan have litigations on Minastrin
Total 46%
Source: Company data, Credit Suisse estimates
03 August 2016
Lupin
(LUPN.BO / LPC IN) 8
Expect mid-single digit EPS CAGR over next two years Lupin should be a beneficiary of faster approvals in the US with strong pipeline of 163
pending ANDAs (as of 31-Mar-2016). Therefore we build in strong base business growth
of 20%+CAGR over next three years for Lupin. This also includes full contribution from
resolution of the Goa plant (and hence inclusion of key products namely Renagel, Renvela
and Welchol). However we expect overall profit growth to be weak due to high contribution
of few products where we expect more competition. We build in Fortamet competition in
FY18 which neutralises the impact of base business growth and further hit to Minastrin in
FY19 leads to overall profit growth to be low at mid-single digit CAGR over next two years.
Our estimates also include positive benefit of recent acquisition of 21 products in Japan
which is EPS accretive (FY17 EPS up by 3%) but in our view pay-back period is longer at
more than seven years given these are off patent products and there will be both volume
loss (generics taking away market share) and price cut (bi-annual price cut).
On the base business, Gavis acquisition ramp-up so far has been slower than expected
with 1Q17 IMS sales for Gavis showing 3% decline QoQ even adjusted for branded
Methergine which now is launched under Lupin label. We note that this is early integration
period for Lupin as Gavis was acquired only in Feb-2016.
Base business growth strong but it’s the high
concentration which leads to low growth
Lupin has a strong pipeline in the US with 163 pending ANDAs (as of 31-Mar-2016) with
one-third of the pending ANDAs at Gavis. We expect Lupin to be a beneficiary of faster
approvals in the US and therefore build in strong ramp-up of the base business where we
expect base business growth at 20%+ CAGR over next three years (Figure 14). However,
we expect a flat year on profits in FY18 due to expected competition from Fortamet and
lower profit growth in FY19 due to competition in Minastrin (Amneal and Mylan also have
litigations on Minastrin).
Figure 14: Split of profits for next three years
FY17E FY18E FY19E
Total EPS 72 73 82
Fortamet 31 15 10
Glumetza 16 9 9
Minastrin 3 11 4
Renvela+Renagel+Welchol - 9 10
Base EPS pre R&D 60 74 92
R&D 37 44 45
Total EPS growth 47% 0% 12%
Base EPS growth (pre R&D) 17% 23% 25%
Source: Company data, Credit Suisse estimates
We expect strong base
business growth of 20%+
CAGR over next three years
but due to high
concentration and hit to
Fortamet profits we expect
overall profit growth to be
weak
03 August 2016
Lupin
(LUPN.BO / LPC IN) 9
We build in full contribution from Goa resolution
from FY18
Figure 15: Lupin's US sales ramp-up in our estimates
900
1,000
1,100
1,200
1,300
1,400
1,500
1,600
4Q16
ann
ualiz
ed
Glu
met
za
Gav
is
Min
astr
in
Oth
ers
(net
of p
rice
eros
ion)
FY
17
For
tam
et h
it
Min
astr
in fu
ll yr
Ren
vela
+ R
enag
el +
Wel
chol
Gav
is
Oth
ers
(net
of p
rice
eros
ion)
FY
18
Lupin US sales ($mn)
2% growth
12% growth
Source: Company data, Credit Suisse estimates
Goa plant had received nine observations each in inspection in July-15 and later in Mar-16.
Lupin had received an Establishment Inspection Report (EIR) for the Jul-2015 inspection
in early July-16 and tentative approval for Lexiva on 27 July 2016. Getting a tentative
approval is positive and could mean that FDA has assigned a "VAI" flag to the inspection
reducing the chance of further escalation / delay in resolution. In our forecast, we have
assumed Goa plant clearance by end of FY17. Therefore, we build in full contribution from
key products namely Renagel, Renvela and Welchol (products which have been getting
delayed since FY15) in our estimates.
Gavis run-rate lagging management guidance
Gavis ramp-up is running below our estimates. IMS sales suggests that Gavis sales have
not ramped-up in 1Q17 quarter (infact Jun quarter IMS sales for Gavis have shown 3%
decline over the Mar-quarter adjusting for branded Methergine which now is launched
under Lupin label). We note that this is early integration period for Lupin as Gavis was
acquired only in Feb-2016.
03 August 2016
Lupin
(LUPN.BO / LPC IN) 10
Figure 16: Gavis run-rate has largely remained flattish since acquisition
20
22
24
26
28
30
32
34
Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16
Gavis Trailing 3-month sales ($mn)
Source: IMS Health, Credit Suisse research
Product acquisitions in Japan is EPS accretive but
payback period high at 7+ years
Lupin acquired 21 off-patent products from Shionogi in Japan for $150mn. The acquisition
enables Lupin to enter Japanese branded market. These products have sales of $90mn
on NHI price basis or $81mn at manufacturer level. The acquisition is EPS accretive
(FY17 EPS up by 3%) but payback is longer than seven years as sales will decline due to
volume loss (generics taking away market share) and price cut (bi-annual price cut). We
have built in positive benefits from this acquisition in the near term.
Figure 17: Japan Deal likely to have payback period of more than 7 years
Key assumptions
Acquired sales ($mn) 90
At Manufacturer ($mn) 81
EBITDA Margin 45%
Annual price erosion 4%
Annual volume loss to generics 2%
Tax rate 30%
Payback - calculation Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9
Sales ($mn) 81 76 72 67 63 59 56 53 49
EBITDA ($mn) 36 33 30 27 25 22 20 17 15
EBITDA Margin 45% 44% 42% 41% 39% 37% 35% 33% 31%
PAT ($mn) 26 23 21 19 17 15 14 12 11
Payback period 7+ Source: Company data, Credit Suisse estimates
03 August 2016
Lupin
(LUPN.BO / LPC IN) 11
Downgrade to UNDERPERFORM (from Outperform) We turn cautious on Lupin as the risk-reward is no longer favourable with the stock pricing in
clearance of Goa facility (in-line with our views) but at the same time not reflecting high risk
from incremental competition in gFortamet. The stock is trading at 23x FY18 EPS and is
valuing Fortamet profits at high multiple despite a high possibility of Mylan and Nostrum
entering Fortamet before patent expiry (Mar-2018 and Mar-2021). We cut our FY18 EPS by
16% as we factor in competition in Fortamet. Our FY18 estimates include full contribution of
Renagel, Renvela, Welchol (Goa resolution) and continued exclusivity on Minastrin beyond
six months. There could be downside risks to our number if there is delay in approval due to
Goa clearance or product specific delay (Renagel, Renvela and Welchol). Our FY17 EPS
increases by 3% due to the Shionogi product acquisition in Japan. Our target price declines
to Rs1,450 and is based on 20x FY18 EPS where we value Fortamet at 10x PE and base
business at 22x FY18 EPS. Risks (1) no further competition in Fortamet till patent expiry in
Mar-2021 (2) faster approvals from Goa facility before FY18.
Stock is pricing in Goa clearance but no hit to
Fortamet
Lupin stock is up ~10% in the past one month and is now factoring in Goa clearance (post
EIR and tentative approval from Goa facility). Lupin is trading at 25x one-year forward P/E
(above past five-year average P/E of 22x) and is valuing Fortamet profits at high multiple
despite a high possibility of Mylan and Nostrum entering Fortamet before patent expiry.
Figure 18: Lupin is trading at higher than last five-year fwd P/E range, despite impending
risks and lower growth trajectory
0x
5x
10x
15x
20x
25x
30x
35x
Aug-11 Mar-12 Oct-12 May-13 Dec-13 Jul-14 Feb-15 Sep-15 Apr-16
Lupin 1 yr fwd PE Lupin last 5 year Avg PE
Source: I/B/E/S, Credit Suisse estimates
Downgrade to UNDERPERFORM; cut TP to Rs1,450
We cut our FY18 EPS by 16% as we factor in competition in Fortamet. Our FY18
estimates include full contribution of Renagel, Renvela, Welchol (Goa resolution) &
continued exclusivity on Minastrin beyond six months. There could be downside risks to
our number if there is delay in approval due to Goa clearance or product specific delay
(Renagel, Revvle and Welchol have been delayed since FY15). Our FY17 EPS increases
by 3% due to the Shionogi product acquisition in Japan. Our target price falls to Rs1,450
(20x FY18) and we downgrade the stock to an UNDERPERFORM.
We value base business at
22x FY18 EPS while
Fortamet profits at 10x FY18
profits
We build full contribution
from Goa facility in FY18
with contribution included
from Renagel, Renvela and
Welchol. We also include
extended exclusivity on
Minastrin beyond six months
03 August 2016
Lupin
(LUPN.BO / LPC IN) 12
Lupin's R&D is higher than peers…
Lupin is under a significant investment mode with high capex (expected to remain
>$180mn) and higher R&D spend then peers (12-15% of sales). Lupin is expected to
spend more than $50mn in inhaler clinical trials for one MDI in US (Albeuterol) and two
DPIs and also undertake biosimilar trials (Etanercept Ph III).
Figure 19: Lupin is increasing R&D spend… Figure 20: …and is higher than peers (avg of 9% of sales)
0%
2%
4%
6%
8%
10%
12%
14%
-
50
100
150
200
250
300
350
400
450
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
R&D ($mn) As a % of sales (RHS)
0%
2%
4%
6%
8%
10%
12%
14%
Lupin DRL Glenmark Sun Cadila Cipla
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
…which we reward by higher base business multiple
We have given Lupin full benefit of higher R&D by assigning higher multiple of 22x FY18
to its base business – 10% higher than peers. We value Fortamet at a lower multiple of
10x as Fortamet sales are expected to decline with more competition.
03 August 2016
Lupin
(LUPN.BO / LPC IN) 13
Lupin LUPN.BO / LPC IN Price (02 Aug 16): Rs1,704.35, Rating:: UNDERPERFORM, Target Price: Rs1,450.00, Analyst: Anubhav Aggarwal
Target price scenario
Scenario TP %Up/Dwn Assumptions
Upside
Central Case 1,450.00 (14.92) 22x PE on FY17 earnings (average multiple for the sector)
Downside
Key earnings drivers 3/16A 3/17E 3/18E 3/19E
Revenue growth (%) 11.3 30.7 14.9 12.0 Domestic Formulations growth (%)
14.3 14.4 17.0 17.0 EBITDA Margins (%) 26.4 28.1 25.3 24.9 — — — — — — — —
Income statement (Rs mn) 3/16A 3/17E 3/18E 3/19E
Sales revenue 142,085 185,669 213,347 238,932 Cost of goods sold 43,094 51,604 60,804 68,096 SG&A 9,288 13,119 15,924 17,647 Other operating exp./(inc.) 52,168 68,791 82,666 93,728 EBITDA 37,534 52,155 53,953 59,461 Depreciation & amortisation 5,224 8,603 11,110 11,610 EBIT 32,310 43,552 42,842 47,851 Net interest expense/(inc.) (73.5) (73.5) (73.5) (73.5) Non-operating inc./(exp.) 1,357 1,508 2,306 2,950 Associates/JV — — — — Recurring PBT 33,741 45,133 45,222 50,874 Exceptionals/extraordinaries — — — — Taxes 11,536 12,637 12,662 14,245 Profit after tax 22,205 32,496 32,560 36,630 Other after tax income — — — — Minority interests 87.6 — — — Preferred dividends — — — — Reported net profit 22,118 32,496 32,560 36,630 Analyst adjustments — — — — Net profit (Credit Suisse) 22,118 32,496 32,560 36,630
Cash flow (Rs mn) 3/16A 3/17E 3/18E 3/19E
EBIT 32,310 43,552 42,842 47,851 Net interest — — — — Tax paid — — — — Working capital (34,008) (14,049) (11,736) (10,849) Other cash & non-cash items (4,968) (2,453) 828 389 Operating cash flow (6,666) 27,050 31,935 37,391 Capex (71,806) (20,910) (12,000) (12,000) Free cash flow to the firm (78,472) 6,140 19,935 25,391 Disposals of fixed assets — — — — Acquisitions — — — — Divestments — — — — Associate investments — — — — Other investment/(outflows) 9.1 — — — Investing cash flow (71,797) (20,910) (12,000) (12,000) Equity raised 2,368 (4) — — Dividends paid (3,382) (4,762) (4,772) (5,368) Net borrowings 66,424 — — — Other financing cash flow 79.8 — — — Financing cash flow 65,490 (4,767) (4,772) (5,368) Total cash flow (12,973) 1,374 15,163 20,023 Adjustments — — — — Net change in cash (12,973) 1,374 15,163 20,023
Balance sheet (Rs mn) 3/16A 3/17E 3/18E 3/19E
Cash & cash equivalents 8,399 9,773 24,936 44,959 Current receivables 45,498 59,455 68,317 76,510 Inventories 31,787 41,538 47,730 53,454 Other current assets 21,809 22,707 26,092 29,221 Current assets 107,493 133,472 167,075 204,144 Property, plant & equip. 59,625 49,855 53,133 55,911 Investments 55.2 55.2 55.2 55.2 Intangibles 56,398 78,475 76,087 73,698 Other non-current assets 806.0 806.0 806.0 806.0 Total assets 224,378 262,664 297,156 334,615 Accounts payable 21,918 28,642 32,912 36,859 Short-term debt 18,036 18,036 18,036 18,036 Current provisions — — — — Other current liabilities 12,497 16,331 18,765 21,015 Current liabilities 52,452 63,009 69,713 75,910 Long-term debt 53,739 53,739 53,739 53,739 Non-current provisions — — — — Other non-current liab. 8,022 8,022 8,022 8,022 Total liabilities 114,213 124,770 131,474 137,671 Shareholders' equity 109,844 137,573 165,361 196,623 Minority interests 320.8 320.8 320.8 320.8 Total liabilities & equity 224,378 262,664 297,156 334,615
Per share data 3/16A 3/17E 3/18E 3/19E
Shares (wtd avg.) (mn) 448.4 448.4 448.4 448.4 EPS (Credit Suisse) (Rs) 49.3 72.5 72.6 81.7 DPS (Rs) 7.5 10.6 10.6 12.0 BVPS (Rs) 245 307 369 438 Operating CFPS (Rs) (14.9) 60.3 71.2 83.4
Key ratios and valuation
3/16A 3/17E 3/18E 3/19E
Growth(%) Sales revenue 11.3 30.7 14.9 12.0 EBIT 1.4 34.8 (1.6) 11.7 Net profit (8.0) 46.9 0.2 12.5 EPS (8.0) 46.9 0.2 12.5 Margins (%) EBITDA 26.4 28.1 25.3 24.9 EBIT 22.7 23.5 20.1 20.0 Pre-tax profit 23.7 24.3 21.2 21.3 Net profit 15.6 17.5 15.3 15.3 Valuation metrics (x) P/E 34.6 23.5 23.5 20.9 P/B 6.96 5.56 4.62 3.89 Dividend yield (%) 0.44 0.62 0.62 0.70 P/CF (115) 28 24 20 EV/sales 5.86 4.47 3.82 3.33 EV/EBITDA 22.2 15.9 15.1 13.4 EV/EBIT 25.8 19.1 19.0 16.6 ROE analysis (%) ROE 22.3 26.3 21.5 20.2 ROIC 17.3 16.8 15.0 15.8 Asset turnover (x) 0.63 0.71 0.72 0.71 Interest burden (x) 1.04 1.04 1.06 1.06 Tax burden (x) 0.66 0.72 0.72 0.72 Financial leverage (x) 2.04 1.90 1.79 1.70 Credit ratios Net debt/equity (%) 57.5 45.0 28.3 13.6 Net debt/EBITDA (x) 1.69 1.19 0.87 0.45 Interest cover (x) (440) (593) (583) (651)
Source: Company data, Thomson Reuters, Credit Suisse estimates.
0
5
10
15
20
25
30
35
2011 2012 2013 2014 2015 2016
12MF P/E multiple
0
1
2
3
4
5
6
7
8
9
2011 2012 2013 2014 2015 2016
12MF P/B multiple
Source: IBES
03 August 2016
Lupin
(LUPN.BO / LPC IN) 14
Companies Mentioned (Price as of 02-Aug-2016)
Ajanta Pharma (AJPH.NS, Rs1825.1) Akorn (AKRX.OQ, $32.89) Alembic Pharma (ALEM.BO, Rs623.15) Alkem (ALKE.NS, Rs1559.7) Allergan Plc. (AGN.N, $250.75) Aspen Pharmacare Holdings Ltd (APNJ.J, R369.6) Aurobindo Pharma Ltd (ARBN.BO, Rs765.2) Biocon (BION.BO, Rs829.25) Cadila Healthcare (CADI.BO, Rs347.75) Cipla Limited (CIPL.BO, Rs518.6) Divi's (DIVI.BO, Rs1181.1) Dr. Reddy's Laboratories Limited (REDY.BO, Rs2977.4) Gedeon Richter (GDRB.BU, Ft5817.0) Glenmark Pharmaceuticals (GLEN.BO, Rs842.25) Hikma Pharmaceuticals Plc (HIK.L, 2672.0p) Hospira Inc (HSP.N, $89.95) IPCA Laboratories Limited (IPCA.BO, Rs512.1) Impax Laboratories, Inc (IPXL.OQ, $30.97) Indoco Remedies (INRM.NS, Rs310.65) Lupin Ltd (LUPN.BO, Rs1704.35, UNDERPERFORM, TP Rs1450.0) Mylan Inc. (MYL.OQ, $46.53) Natco Pharma (NATP.NS, Rs602.7) Perrigo Company plc (PRGO.N, $91.61) Sagent Pharm (SGNT.OQ, $21.74) Shionogi (4507.T, ¥5,443) Sun Pharmaceuticals Industries Limited (SUN.BO, Rs828.75) Taro Pharmaceutical Industries Ltd (TARO.N, $139.97) Teva Pharmaceutical Industries Ltd. (TEVA.N, $52.96) Torrent Pharma (TORP.BO, Rs1479.8)
Disclosure Appendix
Important Global Disclosures
Anubhav Aggarwal and Chunky Shah each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Lupin Ltd (LUPN.BO)
LUPN.BO Closing Price Target Price
Date (Rs) (Rs) Rating
08-Aug-13 801.15 830.00 N
31-Oct-13 887.15 950.00
10-Dec-13 872.45 1025.00 O
28-Oct-14 1357.65 1560.00
03-Feb-15 1545.30 1780.00
11-May-15 1770.15 1585.00 N
27-Jul-15 1617.50 1735.00
26-Aug-15 1811.80 1770.00
23-Sep-15 1921.30 2250.00 O
27-Oct-15 1945.65 2150.00
20-May-16 1505.15 1905.00
* Asterisk signifies initiation or assumption of coverage.
N EU T RA L
O U T PERFO RM
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European rat ings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings
03 August 2016
Lupin
(LUPN.BO / LPC IN) 15
are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 201 2 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the rela tive attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
Not Rated : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time.
Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sec tor. An analyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 53% (45% banking clients)
Neutral/Hold* 31% (13% banking clients)
Underperform/Sell* 15% (33% banking clients)
Restricted 1%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relati ve basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objec tives, current holdings, and other individual factors.
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Target Price and Rating Valuation Methodology and Risks: (12 months) for Lupin Ltd (LUPN.BO)
Method: Our Rs1,450 target price for Lupin is arrived at by applying 20x price-to-earnings multiple to its profits for FY18. The price-to-earnings multiple used for Lupin is in line with the sector average multiple for large caps. Our UNDERPERFORM rating is based on high profit concentration, and expensive valuations
Risk: Upside risks to our Rs1,450 target price and UNDERPERFORM rating for Lupin include: (1) delayed competition in Fortamet; (2) faster than expected new product approvals in the United States; (3) less competition in Minastrin for more than a year; and (4) better than expected ramp-up in Gavis portfolio
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
03 August 2016
Lupin
(LUPN.BO / LPC IN) 16
The subject company (ARBN.BO, TEVA.N, CIPL.BO) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (TEVA.N) within the past 12 months.
Credit Suisse provided non-investment banking services to the subject company (ARBN.BO, TEVA.N) within the past 12 months
Credit Suisse has managed or co-managed a public offering of securities for the subject company (TEVA.N) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (TEVA.N) within the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (LUPN.BO, ARBN.BO, TEVA.N, SUN.BO, CIPL.BO, GLEN.BO, 4507.T) within the next 3 months.
Credit Suisse has received compensation for products and services other than investment banking services from the subject company (ARBN.BO, TEVA.N) within the past 12 months
As of the date of this report, Credit Suisse makes a market in the following subject companies (TEVA.N, PRGO.N).
Please visit https://credit-suisse.com/in/researchdisclosure for additional disclosures mandated vide Securities And Exchange Board of India (Research Analysts) Regulations, 2014
Credit Suisse may have interest in (NATP.NS, INRM.NS, BION.BO, ALKE.NS, AJPH.NS, DIVI.BO, ALEM.BO, LUPN.BO, ARBN.BO, TARO.N, SUN.BO, REDY.BO, CIPL.BO, TORP.BO, IPCA.BO, GLEN.BO, CADI.BO)
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Important Regional Disclosures
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Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.
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As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.
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This research report is authored by:
Credit Suisse Securities (India) Private Limited ................................................................................................ Anubhav Aggarwal ; Chunky Shah
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Credit Suisse Securities (India) Private Limited ................................................................................................ Anubhav Aggarwal ; Chunky Shah
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03 August 2016
Lupin
(LUPN.BO / LPC IN) 17
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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments.
When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.
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