SHARETIPSINFO >>Research Reports >>NATCO PHARMA >> (30-07-2013)

Theme – Supreme Court ruling on Glivec ruling will upgrade the earning.

COMPANY OVERVIEW:
NATCO Pharma ltd was incorporated in Hyderabad in the year 1981, with an initial investment of INR 3.3 million. 
Natco also has the credit of being one of the largest contract manufacturers in India. Some of the well-known companies like Ranbaxy, Dr Reddy's Laboratories, John Wyeth, etc. get their products manufactured by Natco.
Natco Pharma grew in size when three companies, Natco Parenterals, Dr Karanth Pharma Labs and Natco Laboratories merged with it.
It is a leading domestic player in the oncology space. The company derives 50% of sales from the oncology business. Domestic oncology segment, its core competence, in which it leads with a ~30% share in the domestic generic market.

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.

Manufacturing:
The Company owns six manufacturing facilities including four formulation facilities and two API facilities.

Exports:
Its formulations are exported to the CIS States, Vietnam, Hongkong, China, Netherlands, Nigeria, Tanzania and Kenya.

Business area of the company
Natco manufactures a comprehensive range of branded and generic dosage forms, bulk actives and intermediates for both Indian as well as International markets.
The product range of the company includes:

• Diltiazem 
• Omeprazole 
• Lansoprazole 
• Isosorbides 
• Sumatriptan succinate 
• Ondansetron 
• Sertraline 
• Granisetron 
• Paroxetine 
• Newer Quinolones and fourth genaration Cephalosorins

Revenue Break up:

Key Management Recent Developments:

1. Steady growth to continue in base business. Natco Pharma’s management is confident of achieving 15-20% revenue growth in its base business. The growth would be largely driven by strong traction in its API business, the growing base of export formulations and its stable domestic oncology portfolio.
2. Exiting the domestic branded generic (non-oncology) business. Keen competition is leading the company to move out of the domestic non oncology branded generics business.
3. US launches are key triggers. Natco’s healthy pipeline of niche products in the US market would attract huge cash flows. It has made 31 ANDA filings, of which eight have been approved. Of the pending ANDAs, it has four FTF (first-to-file) opportunities. Copaxone is not an FTF but is the largest opportunity that would come up in FY15-16 depending upon the outcome of the hearing in Sep’13.

INDUSTRY OUTLOOK:
The Indian pharmaceutical industry is expected to grow by 10-12 per cent during 2013-14, says a recent study by ICRA. The main driver for growth will come from generic opportunities in the US. Generic opportunities in US will continue to drive revenue growth for Indian pharma companies. Drugs worth $80 billion are expected to go off patent over the next four to five years. Indian companies have lined up strong product pipelines of pending abbreviated new drug applications (ANDAs). Acquisitions by Indian companies to add technical capabilities and focus on strengthening branded business (albeit on a small scale) are also likely to drive growth going forward as companies feel the need to diversify.
The impact of new drug price control order (DPCO) though expected to be limited, could also get offset by volume expansion and efforts of industry participants to take price hike in rest of the portfolio.

INVESTMENT RATIONAL:
Natco Pharma’s management is confident of achieving 15-20% revenue growth in its base business.

It has made 31 ANDA filings, of which eight have been approved. Of the pending ANDAs, it has four FTF (first-to-file) opportunities. Copaxone is not an FTF but is the largest opportunity that would come up in FY15-16 depending upon the outcome of the hearing in Sep’13.

1. Lanthanum Carbonate

The patent for this belongs to Shire, which markets it under the brand name, Fosrenol. The brand commands ~US$110m in annual revenue in the US, and ~US$180m globally. Natco has partnered with Lupin for this product.

2. Lenalidomide

Revlimid is indicated in treatment of patients with multiple myeloma. Its annual market size in CY12 was more than US$2.8bn in the US alone. Natco has selected Watson Pharmaceuticals of the US to market this product for which it has FTF status.

3. Oseltamivir phosphate

The patent for this belongs to Roche, which markets it under the brand name, Tamiflu. Tamiflu is indicated in treatment of swine flu and has an annual branded market size of US$373m in the US alone. We expect this product to be launched by Natco’s partner, Alvogen, only after Aug’15, when the first patent expires. Natco has FTF status on it.

4. Glatiramer Acetate

The brand name of the product is Copaxone and it is one of the largest opportunities for Natco. The patent is owned by Teva and is indicated in treating multiple sclerosis. It has an annual market size of ~US$2.9bn in the US. Natco has selected Mylan for regulatory filings and marketing in various countries including US, Europe and Japan. It does not have FTF status but is the second to file.

5. Lansoprazole

The brand name of the product is Prevacid and the innovator of the product is Takeda. The annual size of the product was ~US$3bn at the brand price before patent expiry. A few generic players – DRL, Teva, Mylan, and Sandoz – have already entered the market.

Risk:

1. Currency fluctuations and regulatory hurdles.
2. Delay in approval of para IV products in the US market.

TREND OF SHAREHOLDING PATTERN IN LAST 3 QUARTER:

FINANCIAL:

Key Highlights:

• Total Income grew at CAGR of 12% in the last four years to Rs 676 cr.
• PBIDTA grew at CAGR of 21.3% in the last four years to Rs 162.4 cr.
• PAT grew at CAGR of 17.5% over the last four years to Rs 77.7 cr.

RATIOS:

 
Key Highlights:

1. EPS grew at CAGR of 17.5% to Rs 24.7 in the last four years.
2. PBIDTA Margin increased from 18.9% to 24% in the last four years.
3. NPM increased from 9.97% to 11.48% in the four years.
4. Interest cover too increased from 5.7 to 10.02. This shows interest burden decreased.

COMPARISION OF Q4FY2013 WITH Q4FY2013:

Key Highlights:

1. Total Income increased by 13% in Q4FY13 to Rs 169 cr (YoY).
2. PBIDTA increased by 53% in Q4FY13 to Rs 36.1 cr (YoY).
3. PBIT increased by 36% in Q4FY13 to Rs 30 cr (YoY). Higher depreciation cost led to decline.
4. PAT declined by 12.3% in Q4FY13 to Rs 8.4 (YoY). Higher tax burden led to decline.

VALUATION &OUTLOOK:
We expect FY14E EPS of Rs 30, stock is trading at 16.7X. We value the stock at 25X; the Fair value of the stock comes at Rs 750.
Company has potential increase the earning significantly as many products are in pipeline.

CONCLUSION:
Investors with 6-8 months time horizon could take position. Downside in the stock remains limited.

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