US regulator looms over Natco prospects

Company says no impact on product pipeline but Street awaits more clarity

The stock of Natco Pharma dropped 13 per cent on Monday, after the company received a Form 483 from the US Food and Drug Administration (USFDA). This notifies objectionable conditions after an inspection. The company received eight such observations for its formulation plant at Kothur, near Hyderabad, and the API (active pharmaceutical ingredient) unit at Manali (near Chennai), after inspections by the US FDA in February and March, respectively. The two plants are said to contribute less than 10 per cent to Natco's yearly revenues.

Natco said it had already sent a response and a compliance report. It said there would be no impact on its current or future pipeline of products from these units. However, the Street is not taking the development lightly.  Although the detailed USFDA observations are not available, Religare Institutional Research says, “Our initial reading is that the issues listed are rather serious.”

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The concerns seem valid, if you look at other pharma companies that received observations from the USFDA. While the complete resolution of issues takes time, investors are hoping the matter doesn’t escalate. Also, it’s not the current contribution from these plants, but the future contribution that the Street is worried about. There are two products to be launched in the US that hold promise: Copaxone’s generics (multiple sclerosis drug) and Tamiflu’s generics (influenza treatment).

Analysts say while Copaxone is not produced from the plants in question, Natco’s other products (including Tamiflu, tentative launch by February 2017) are produced from here. Uncertainties over these might keep the stock under pressure in the near term.

While further clarity or resolution of USFDA issues could be positives, the launch of Copaxone generics can add to revenue growth. Besides the US, Natco has been doing well in the domestic arena. Its Hepatitis-C treatment drugs are driving growth.

During the December quarter, Natco’s 41 per cent year-on-year revenue growth was led by Sovaldi generics and other Hepatitis-C drug combinations. The hepatitis portfolio is estimated to have accounted for about a third of sales. The strong traction is likely to continue and the company is expanding its basket of products and is spreading in emerging markets. All these are positive and can provide downside support, only if more negative surprises don’t appear.