BackLupin’s Merck deal underwhelms investors
Lupin's role to develop drugs, while Merck's to sell in emerging markets is contrary to what investors may have expected
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Lupin Ltd and Merck Serono, a division of Merck KGaA, have decided to make and sell certain drugs in emerging markets, proving right recent news reports. But Lupin’s role is to develop and make these drugs, while Merck will do the selling, contrary to some reports that had indicated Lupin may market drugs in emerging markets. That may have disappointed investors, leading to the stock declining by 3.7% on Tuesday.
Financial details, too, have not been disclosed but the structure gives some clues. Lupin will earn fees—both upfront and milestone-based—from Merck to develop drugs. An upfront payment could part-fund its costs to develop, provide drug filings, and supply these medicines. Milestone payments will give it additional payments if it successfully crosses pre-determined legs of the process in time.
The partnership will cover major emerging markets for supplying drugs in general medicine and endocrinology areas, with a focus on diabetes and cardiovascular diseases. The first launches are expected in 2016 and about 20 products could be developed.
From Lupin’s viewpoint, this transaction is less risky as its initial cost of developing these drugs for Merck will be covered by the upfront and milestone payments. The market risk, too, is being borne by Merck. However, it also means that Merck is likely to keep a larger share of the revenue and profit. Lupin’s revenue, once production starts, may also depend on a schedule set by Merck.
Still, the portfolio being developed is of relatively higher-value drugs, and could prove to be profitable for Lupin. How profitable is an answer that will only be known later. The first indications should become evident when it reports receipts of milestone payments.
But for the moment, shareholders have decided that the rise in its price is enough. Last week, Lupin had announced a marketing tie-up to sell some of Salix Pharmaceuticals Inc’s products through Lupin’s Canadian sales network. Both these developments have seen its share rise by 7% between 11 September (a day before the Salix transaction was announced) and 15 September.
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