Lupin’s recall of Metformin extended-release tablets from the US has not seen much of a reaction in its stock price. After a marginal dip in Lupin’s shares over the last five days, they were trading about 1% higher on Thursday.
But the recall is likely to be costly for the company. Not only will Lupin lose sales opportunities in the near term, but the cost of recallwill also be substantial.
Sales of generics Fortamet and Glumetza, the extended-release formulations marketed in the US, range about $25-40 million in FY20, which, according to analysts, is a substantial sum. In fact, analysts had been expecting substantial sales from the products for FY21 as well, but that would now take a hit.
“Potential recall-related disruption presents a risk of $25 million and $15 million to our FY21 and FY22 sales estimates, which might translate to a downside risk of $10 million and $4 million to FY21 and FY22 earnings estimates respectively,” said Nomura India analysts in a note to clients.
Besides, consumer-level recalls are costly exercises, which could further slash profitability. While this depends on the extent of recall from consumers, analysts are factoring in about a $10 million additional one-time cost.
While the company said that it does expect to re-launch soon, there could still be an impact as it could lose market share. Competition in the US is quite stiff.
Much will depend on how soon Lupin can re-launch products in the US. Generic Glumetza sales continue to be steady in the US and that could help regain some lost ground for Lupin, say analysts. However, sales of Formetza have been on a decline in the US, so it may not regain much.
Another worry is whether this recall triggers adverse US FDA regulatory action. In the past, such recalls have triggered FDA inspection. This was the case with Sartans where a large number of companies were impacted, triggering warning letters for several plants.
Besides, analysts note that there are several metformin formulation producers selling in the US, which means there is no shortage of the drug.
Of course, Lupin’s launch of some of its other products is not likely to be impacted. Nevertheless, the recent increase in investor sentiment towards pharma stocks seems to be over-stretched for Lupin. The stock’s price-earnings at multiple of 37 times earnings for FY20 are not quite comforting.