Natco's niche portfolio is an opportunity

The company's strong prospects make the risk-reward favourable

Natco Pharma, which had reported strong June quarter performance unlike larger peers, has seen a steep correction in its share price thereafter. Its marketing partner Mylanindicated  a delay in generic Copaxone launch, a multiple sclerosis treatment drug. Mylan indicated that all major launches including generic Copaxone would be deferred from 2017 to 2018 due to ongoing challenges in the US and uncertain regulatory environment. Clearly, since the street was factoring the gains in FY18, the news is a disappointment. However, while the product launch has been delayed, it hasn't derailed. Thus, the stock price correction can be looked upon as a good opportunity for longer-term investors, as business prospects remain healthy.

Natco’s business model in the US is challenging large and complex product patents with a small but effective portfolio of complex molecules which face limited competition. Thus, it had been able to launch products at regular intervals and this has continued to drive its performance. The last large product launch was Tamiflu generics in December 2016, which has contributed more than $100 million in revenues. The next big opportunity is Copaxone. While it has been delayed, there are smaller opportunities too. The company with its partner Lupin has received approval for renal treatment generics drug of Fosrenol chewable tablets recently. The product is slightly more than a million dollar and the company can garner reasonable share (about $10-20 million). Similarly, there are opportunities like oncology treatment Revlimid, hypertension drug Tracleer, and so on or mature molecules which are complex in nature and have limited competition such as oncology drug Vidaza injections generics and Doxil generics. The latter has already been launched and will contribute well from September quarter.

Although the US contributes 40 per cent to the topline, Natco derives a similar share from the domestic arena too. The growth in its niche portfolio is shaping well in India. Natco’s strong foothold in Hepatitis-C segment (about a fourth of domestic revenues) may have seen some part of it come under price control, but analysts feel new launches will lead to sustainable growth. Oncology, too, is growing well contributing about a fifth to domestic sales. Management, in the analyst concal post results, indicated that is now focusing on increasing investments in India and Rest of The World (RoW) markets. Though some may have perceived it negatively, it is a good proposition looking at the challenging US environment. Its India revenues have grown fourfold in last three years and FY17 saw a 39 per cent growth. Further, RoW markets also offer good opportunity looking at the low base of Natco. Analysts such as Ranvir Singh at Systematix Shares say that the strategy is positive and the company has continued to surprise with its US launches regularly.

Analysts at Axis Capital have factored in the delay in Copaxone launch and cut their FY18/19 EPS by 15 per cent but still, arrive at DCF (discounted cash flow) based target price of Rs 940. Their scenario analysis suggests bull case target of Rs 1,120 and bear case target price of Rs 825. Clearly, there are gains from current levels of Rs 718.