Natco Pharma: Good prognosis

Pipeline of niche launches in the US and shift in focus to other geographies should pay off

The stock of Natco Pharma has been on the back foot over the last 12-15 months. Concerns over the company’s growth prospects due to lack of near-term meaningful launches, fear of increasing competition in its blockbuster Copaxone generic drug in the US and possible moderation in revenues from its Tamiflu drug, have been plaguing investors.

But the Copaxone drug, which operates in a three-player market in the US currently, is expected to continue to generate revenues for at least the next six to nine months. Also, the company has a strong pipeline in niche and complex generics that augur well for its growth over the long run.

The company’s shift in focus to other geographies, while reducing R&D spend on the US market, may also have impacted investor sentiment. But given the structural issues in the US market and the fact that companies focussing on this geography have been hit hard in the past few years due to stringent actions from the US drug regulator, FDA (Food and Drug Administration), exploring opportunities in other markets could pay off in the long run. The stock is down 32 per cent from our last ‘Buy’ call in May 2018. The company’s fourth quarter results (FY19) further dampened sentiments.

In FY19, Natco’s consolidated revenue declined by 5 per cent to ₹2,095 crore and the consolidated net profit fell by 7 per cent to ₹644 crore mainly due to significant price erosion in its Tamiflu generic drug in the US and writing down of inventories. However, the operating margin for the company in FY19 remained healthy at 42 per cent vis-a-vis other pharma players.

Also, the company’s long-term growth prospects look healthy, thanks to niche launches in the US and good traction in India, Brazil, Canada and China businesses. Foraying into niche agro chemicals business is also expected to contribute to its revenue in the next two to three years.

With the correction in share price, the stock looks attractive from a valuation perspective. At the current price of ₹542, the stock trades at about 15 times its estimated FY21 earnings compared with the 16-18 times that peers such as Alembic Pharma, Ajanta Pharma and IPCA Labs enjoy.

Investors with a long, three to five-year horizon can consider buying the stock.

 

 

 

Natco Pharma is a mid-sized company with a healthy presence in India and the US. The domestic formulation business accounts for 33 per cent of the company’s revenue, international formulation contributes 40 per cent, and API chips in with around 13 per cent (as of March 2019).

The company focusses on products that are difficult to formulate and manufacture, and are facing complex legal and regulatory challenges.

This strategy has paid-off for the company over the long run, with its consolidated revenue and net profit growing 23 per cent and 44 per cent CAGR (compounded annualised growth rate) respectively, in the past five years (FY14-19).

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.

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. The drug contributed around one-third of its revenue in FY 2017. The licensing agreement from Gilead Sciences to make and sell hepatitis-C medicines in India and 100 other developing countries has also provided a leg-up to the company’s revenues.

The US market presents a significant opportunity for the company, with a pipeline in niche, high-potential, complex generics. As of March 2019, the company holds 56 niche ANDA filings, including 20 of Para IV filings, of which 30 have been approved.

Partnering with Mylan, the company launched the generic version of Teva’s drug, Copaxone (around $4 billon sales of innovator’s drug), for multiple sclerosis in the US during the third quarter of FY18. This drug has generated windfall gains for the company. While many firms have filed for the approval, Copaxone drug has been a three-player market in the US. Healthy revenue from it is likely continue for Natco, at least for the next six to nine months.

Natco has filed for approval the Revlimid (Lenalidomide) generic drug, which is expected to be a blockbuster product for the company. The innovator drug Revlimid currently has sales of $6.2 billon in the US. The management expects the approval for this generic drug by FY22. Natco’s pipeline has some other interesting ANDAs for drugs, including Gilenya, Sovaldi, Nexavar and Tracleer.

 

 

Strong domestic portfolio

Natco Pharma enjoys leadership position in the domestic oncology segment. The company has registered strong growth over the last five years in domestic formulation sales. It has a strong presence in the oncology segment with a portfolio of 29 products covering a fourth of the domestic market. The growth prospects in this segment look robust.

With high prevalence of hepatitis-C cases in developing markets, 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 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.

In Brazil, it has filed multiple oncology products. The management has guided for six to eight launches in India; two to three in Canada and three to four in Brazil in FY20. The company expects 30-40 per cent revenue growth from India, Canada and Brazil markets in FY20, on a very small base.

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