Natco: Stock correction an opportunity as earnings trajectory remains firm

Niche pipeline to keep Natco in good health

Natco Pharma, one of the few outperformers in the pharma pack until recently, has seen its share price fall by a fourth since its January high of Rs 1,050. While the launch of copaxone generics (oncology treatment) in the US was among the key reasons for earlier gains, some disappointment in the December quarter (Q3) results, coupled with weakness in broader markets, contributed to the recent correction. Nevertheless, this fall offers investors an opportunity, given the company’s strong future prospects, say analysts.

In Q3, Natco’s revenues fell 16 per cent year-on-year (y-o-y) to Rs 5.6 billion due to the high base of last year, to which tamiflu generic (anti-viral drug for flu treatment), launched on exclusivity basis, had majorly contributed. Analysts also attribute the drop in revenues to the subdued performance of its hepatitis-C drugs in India and partly due to the lower-than-expected revenue recognition of copaxone. Yet, the operating performance was robust, with profit margins surging 1,260 basis points y-o-y to 51 per cent. These operational gains were led by copaxone and doxil generics. Thus, net profit grew 11.5 per cent y-o-y. Natco said the market share in the copaxone segment was ahead of estimates and the company was confident of achieving its targeted share.

The Street’s worry stems from the possible entry of two more generic players in 2019 — Sandoz by end-FY18 or early FY19 and Dr Reddy’s by mid-FY20. However, analysts at Jefferies said that currently, Natco is building two generics entrants but the ramp-up for new entrants will be slower. Hence, the analysts have marginally reduced Natco’s FY19 market share estimate to 32 per cent for 40 mg copaxone against the earlier 35 per cent. But they still expected strong growth.

Ranbir Singh at Systematix Shares, too, felt Natco will remain a key player in copaxone and the product will continue to drive its earnings for a long time.

Against this backdrop, Jefferies expects Natco’s earnings to double over FY17-19, while ICICI Securities said FY19 will be strong on the back of limited competition in copaxone. They also expect operating profit margins to stay strong, given the ramp-up in copaxone and doxil sales.

Analysts said Natco, which has always targeted niche limited-competition launches and regularly surprised with new approvals, had more products in its arsenal. IDFC Securities said the anticipated launches of nexavar (oncology treatment) and revlimid (multiple myeloma drug) generics, accompanied with the scale-up in India and Rest of the World markets, will drive earnings over the next three to five years.

Meanwhile, the US Food and Drug Administration completed the inspection of Natco’s Mekaguda API (active pharma ingredients) facility with zero observations, thereby easing potential regulatory concerns.

Natco’s hepatitis-C range in India might have seen weakness due to price control but the company is planning new product extensions and geographical expansion to ensure growth.

Singh, however, said the weakness is priced in and the stock correction has made valuations attractive.