Natco a safer bet in volatile pharma pack

US sales are being driven by niche complex products, domestic specialty range is also seeing traction

The Natco Pharma stock has been among the few outperformers from the pharma pack and given the recent news flow and the company’s growth prospects, there could be more gains for investors.

While Natco launched the Hepatitis-B drug in India on Tuesday, it approved the closure of its qualified institutional placement (QIP) document over the last weekend. But, most significant is last week’s news of Teva dropping patent litigation against Mylan (Natco’s marketing partner) with respect to the US launch of generics of Copaxone 40 mg injections.

Thus the Copaxone 40 mg generic should drive Natco’s fortunes given its potential opportunity of $60-80 million. Analysts say the case’s withdrawal is positive as it gives greater comfort and confidence in Mylan (and Natco’s) ability to provide complex products as affordable treatment options and the end of patent litigation reduces a significant risk. “We expect Natco to report a robust H2FY2018 performance as Mylan is the only generic player in the US market for Copaxone 40 mg generics,” say analysts at Sharekhan. They expect Natco to clock sales of $360 million from Copaxone generics over 30 months (H2FY18 to FY20). Since the product is a limited-competition complex generic, Natco should enjoy substantially higher margins.

Complex generics have been the key strength of Natco, which together with marketing partners, has continued to surprise with regular launches. There are more products in its armoury for the US markets, and Natco is also carefully developing its domestic sales through a focus on specialty products. New launches should strengthen the segment since some existing products have come under price control.

Further, Natco is focusing on oncology, cardiology and diabetology as well. In oncology, six of its brands are top-sellers and all new products launched in FY18 are doing well. Natco’s oncology revenue has clocked 28 per cent compounded annual growth (CAGR) over FY14-17 and analysts at Anand Rathi expect a revenue CAGR of 20 per cent over FY17-20. Meanwhile, Natco’s proposed QIP may lead to some equity dilution but analysts says with Copaxone generics to provide significant boost to earnings, they are not much concerned.

Ranbir Singh of Systematix expects 10 per cent return from the stock, whereas analysts at Sharekhan expect 18-20 per cent upside over the next six months. Sharekhan expects Natco’s sales and profitability to clock a CAGR of 34 per cent and 45 per cent, respectively during FY18-20.