Natco Pharma Ltd - Research Report

 

Private Client Research

Rating

Buy

Sector

Healthcare

Company

Natco Pharma Ltd

Reco Price
Rs. 803
Price Target (12 Months)
Rs. 1500
Upside
86.80%

Date

25 February 2014
Sensex
20852.47
CNX Nifty
6200.05

Exchange

Code

NSE
NATCOPHARM
BSE
524816

Revlimid and Copaxone the two most blockbuster drugs for Natco Pharma in US to drive the future growth.

US Operations biggest strength:
Natco pharma ltd (NPL)’s US business is the biggest strength in its overall business profile because of a strong pipeline of niche and Para-IV filings. The company's strategy in the US has been to file niche and Para IV products and then partner with a large generic player in order to mitigate the litigation risk as well as costs. It has a portfolio of 31 filings, mostly in the oncology space and has launched 7 products (out of 9 approved products). The company has filings for Revlimid (sole FTF, market size: US$2.2bn) and Copaxone (second filer, market size: US$2.9bn), two of the most complex blockbuster drugs in the US.

Strong Para IV Pipeline:
The Company has already received a favorable verdict from the Supreme Court as well as Federal Circuit Court regarding Copaxone (Glatiramer Aceate), which would most probably allow it to launch the product in May’14 with its partner Mylan, depending upon USFDA approval. Given the complexity of the product, it can be a limited competition product for an extended period of time and could lead to a re-rating of NPL’s valuation, with a further upside likely when other opportunities materialize. Hence over FY14-16 the strong growth is expected in revenue and PAT, led by the growing formulations business and steady growth in API business.

Prevacid (lansoprazole) and Prevacid 24-hour OTC (lansoprazole 24-hour OTC):
NPL has Para III on Prevacid and Prevacid 24-hour OTC and has partnered with Actavis and Breckenridge, respectively, for these products. Prevacid is mainly for the treatment of stomach and intestinal ulcers. Prevacid market size is US$600mn and Prevacid OTC market size is US$300mn. Actavis launched generic Prevacid in December 2012 and there are currently five other approved players. NPL is still awaiting approval for Prevacid 24-hour OTC, which is expected any time soon. Currently, there are three approved players for Prevacid OTC. While these products are already generic, the competition so far has been limited due to complex nature of the products. This can be the next trigger for boosting the company’s revenues in next two years.

Teva USFDA approval big positive:
Recently the USFDA has approved Teva’s supplemental new drug application (SNDA) for three-times-a-week Copaxone 40mg/ml, a new dose over and above the earlier version of 20mg/ml This new formulation will allow for a less frequent dosing regimen administered subcutaneously for patients with relapsing forms of multiple sclerosis (MS). Teva is planning to convert 57% of patients to the 40 mg dose injected three times a week from a daily dose of 20 mg by year end. For the December quarter Copaxone sales stood at US$ 805 million in the US. This drug is a very high value drug. USD 4 billion is the US market size for this drug with Teva being the innovator.

Domestic business:
NPL’s domestic business is largely focused on the oncology segment, which contributes around 70% to overall domestic sales. It is a leading player in the domestic oncology segment with around 30% market share (FY13 revenue Rs 140 crores). The oncology market in India has been showing a 15%-18% CAGR, driven by a swift rise in cancer patients, improved access to cancer therapy, better insurance coverage and higher healthcare spending among the growing middle class population. Given the fact that India is still a highly underpenetrated healthcare market, Industry believes the market’s growth will sustain in the long run. NPL’s growth in the oncology segment historically has been in line with market growth, with oncology revenue posting a 17% CAGR over FY08-FY12.

Formulations key growth driver:
The Company reported a strong 65% yoy increase in revenue from the export formulations business during the last quarter, led by new contract for supplies of various formulations to Venezeula and ramp up in US sales. The domestic oncology formulations business also reported strong 68% growth in revenue. Higher formulations revenue led to margin expansion.

Stock Data

CMP (Rs)
795.25
Face value (Rs)
10
52 Week Range (Rs)
840 -390
Market cap (Rs Crores)
2630.13
Price To Book Value (x)
3.60
P/E Ratio (x)
34.71
EV/EBIDTA (x)
19.62

One Year indexed Stock Performance

Natco Pharma LtdSensex
Natco Pharma Ltd
Performance (%)
1m
3m
1year
Absolute
0.10
35.89
86.53
Sensex
-1.33
12.37
7.87

Shareholders

(in %)
31-Dec
Promoter
53.70
FII
11.46
DII
10.83
Others
24.01
Total
100

+91 22 6639 3000
research@stockaxis.com

 

Industry

The industry is expected to grow approximately 28% by 2015 to reach US$1.1 tn. Market growth will be driven by a continuing shift to generics and the rapid growth of “pharmerging” markets. In addition, drugs in the diabetic and oncology therapeutic sectors will grow more rapidly than other sectors. In production capabilities to meet demand and streamline their supply chain to meet the dynamics of each unique market. India’s pharmaceutical market is one of the fastest growing globally and is estimated to rise upto US$17.5 bn in CY14.

The pharmaceutical industry in India is subject to price controls and the prices of some products are determined by the Government. Though only some products manufactured by NATCO are likely to be a subject matter of price control mechanism under the Indian law, nevertheless, governmental compulsions for reduction in the prevailing prices remains a risk. Being a pharma company with a human touch, NATCO has always and would continue to abide by the legislative or governmental compulsions, if any. In this direction, Efforts are made to offset such losses by more effective and efficient management of its resources, controlling costs and launching of superior and new products.

Profile

Natco Pharma is a mid-sized pharma company with a presence in active pharmaceutical ingredients (APIs), formulations, contract research & manufacturing services business (CRAMS) and the US retail business. The company owns six manufacturing facilities including four formulation facilities and two API facilities. NPL is a leading domestic player in the oncology space. The company derives 50% of sales from the oncology business, which is grouped into various subcategories. For overseas markets, NPL has built up a large base of strategic alliances with international companies. The company has partnered with leading global pharmaceutical and generic companies like Mylan Inc, Watson, Actavis, Breckinridge Pharmaceuticals, Alvogen and Lupin in various jurisdictions, including the US.

Profit & Loss Statement:- (Consolidated)
(Rs Crores)
Particulars
 
30-Jun-12
30-Jun-13
30-Jun-14E
30-Jun-15E
Income:-
  • Sales
  • Total Expenditure
  • EBIDTA
  • Other Income
  • Operating Profit
  • Interest
  • Profit Before Depreciation & Tax
  • Depreciation
  • Profit Before Tax
  • Exceptional item
  • Profit Before Tax (after exceptional item)
  • Tax
  • PAT
  • Adjusted (EPS)
  •  
  • 523.72
  • 414.38
  • 109.34
  • 9.14
  • 118.48
  • 23.04
  • 95.44
  • 15.91
  • 79.53
  • -
  • 79.53
  • 21.07
  • 58.46
  • 19.14
  • 660.53
  • 510.60
  • 149.93
  • 12.41
  • 162.34
  • 26.31
  • 136.03
  • 22.12
  • 113.91
  • -11.58
  • 102.33
  • 36.44
  • 65.89
  • 22.91
  • 765.30
  • 575.00
  • 190.30
  • 14.67
  • 204.97
  • 29.35
  • 175.62
  • 27.50
  • 148.12
  • -
  • 148.12
  • 44.50
  • 103.62
  • 36.03
  • 1180.00
  • 835.00
  • 345.00
  • 18.69
  • 363.69
  • 33.52
  • 330.17
  • 33.02
  • 297.15
  • -
  • 297.15
  • 89.40
  • 207.75
  • 72.23
Source: Stockaxis Research, Company Data

Valuation

NPL is reducing its non-oncology portfolio in India as well as looking to sell its retail pharmacy business in the US, both of which would increase margins in the long run. Further, on scaling down capex i.e. at a pace of Rs 40 crores going forward as against Rs230 crores in FY13), due to which we expect RoE/RoCE to improve from current levels drastically. With the improvement in its financials and strong prospects of the US product pipeline bearing fruit, we assign the valuation of 20.76 x to FY 2015E earnings which indicates a target price of Rs 1500 which is a big upside from current levels.

 
 

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