Natco Pharma: Tonic for growth

The past few years have been docile for Indian pharma companies. Regulatory tightening, coupled with multiple headwinds in the key markets, have not augured well for Indian drug makers.

The companies focussing on the US market have been hit harder due to stringent actions from the US drug regulator, FDA (Food and Drug Administration). Structural issues in the US have also impacted revenues from this geography.

While the near-term outlook for US-focussed companies seems hazy, firms that have a strong domestic presence — apart from a growing US business — with a focus on niche, high-margin, complex generics, are likely to do well.

Natco Pharma is one such company. A strong domestic presence, a growing US pipeline — especially in complex generics, which have high entry barriers — and a robust position in the oncology and hepatitis-C segments, are positives.

The stock is down 22 per cent from its January 2018 highs. Concerns about increased competition in its recently-launched Copaxone generic drug in the US, lack of near-term high-value launches and weak market sentiment towards pharma stocks have taken a toll.

With the correction in share price, the stock is looking attractive from a valuation perspective. At the current price of ₹794, the stock trades at about 17 times its estimated 2019-20 earnings, compared with the 20-plus times that peers such as Ajanta Pharma and Alembic Pharmaceuticals enjoy. Investors with a two to three-year time horizon can consider buying the stock.

Natco Pharma is a mid-sized company with a healthy presence across India and the US. The domestic formulation business accounts for 42 per cent of the company’s revenue, while international formulation accounts for 40 per cent, and API chips in with around 9 per cent.

The company focusses on products that are difficult to formulate and manufacture, and are facing complex legal and regulatory challenges. This approach has paid off well for the company over the long run, with its consolidated revenue and net profit growing 31 per cent and 52 per cent CAGR (compounded annualised growth rate) respectively, in the past five years (FY13-17).

Low-risk model in US

The company has followed the strategy of partnering with global generic players such as Mylan, Breckenridge Pharmaceutical, Actavis Genrics and Lupin to expand in the US generic market. The front-end tie-ups have helped the company de-risk at various levels on filing, litigation and regulatory processes to secure ANDA (abbreviated new drug application) approvals. As per the agreements, the partners handle the litigation costs and marketing, while Natco receives a share of the profit for manufacturing the formulations.

This strategy has paid off well in the last three years. For instance, partnering with Alvogen, the company launched Tamiflu generic (used in treatment of flu) with 75-day exclusivity in the US in December 2016. This contributed around one-third of its revenue in FY 2017.

Similarly, the company partnered with Mylan and launched the generic version of Teva’s drug Copaxone for multiple sclerosis in the US. According to the management, the revenue share from Copaxone’s 20 mg and 40 mg formats are 3.5 and 15 per cent respectively, over the next couple of years.

The licensing agreement from Gilead Sciences to manufacture and market hepatitis-C medicines in India and 100 other developing countries should also provide a leg-up to the company’s revenue, going ahead.

The US market presents a significant opportunity for the company, with a pipeline in niche, high-potential, complex generics. As of December 2017, the company holds 45 niche ANDA filings, including 16 of Para IV filings, of which 29 have been approved.

Compared with peers, Natco’s US portfolio is likely to face relatively lower price risk, given the complexity of its product portfolio and limited competition.

Strong domestic portfolio

Natco Pharma enjoys leadership position in the domestic oncology and gastro-hepatology segments. The company has registered very strong growth over the last three years in domestic formulation sales — 67 per cent CAGR to ₹881 crore in FY2017 from ₹198 crore recorded in FY2014.

The oncology portfolio contributes about one-third to Natco’s topline.

The company has a strong presence in the oncology segment with a portfolio of 30 products covering a fourth of the domestic market.

While the domestic oncology market has grown 13-14 per cent in the last three years, Natco’s oncology business grew 27 per cent CAGR, aided by strong legacy brands and effective distribution channels.

The growth prospects in this segment looks robust, given the company’s expanding presence and limited competition.

Despite pricing pressure, the company grew faster in the domestic hepatitis-C market. Natco enjoys 50-70 per cent domestic market share in these key four compounds.

With a high prevalence of hepatitis-C cases in developing regions, the company stands to benefit by selling Gilead’s licensed products.

Besides eyeing high-value sub-therapies with a large market size, the company launched its cardiology and diabetology divisions in early 2017 to expand its domestic business.

Geographical expansion

The company foresees opportunities from its growing presence in new markets in many regions, led by hepatitis-C franchise products. In Canada, it launched Tamiflu generic and obtained 12 approvals and successful listings in major provinces and retail chains.

In Brazil, it has filed multiple oncology products. In Europe, it has forged distribution arrangements to sell products in Eastern Europe, the UK and Germany.

The company’s R&D capabilities have been demonstrated by its complex and niche product filings in formulations.

It utilised most of the QIP (Qualified Institutional Placement) amount (around ₹800 crore of the ₹915 crore) on developing complex generics for the US market and on Indian branded generics.

Financials

For the nine months ended December 2017, the consolidated revenue (₹1,380 crore) fell 4 per cent, while the net profit (₹402 crore) grew 27 per cent.

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