Natco Pharma: Healthy prospects

June 5, 2016:  

Stocks of leading drug makers have corrected significantly since early 2016, due to the weak sentiment and concerns about regulatory action by the US drug regulator Food and Drug Administration (FDA) on many large Indian drug makers. But this provides a good buying opportunity in fundamentally sound businesses with healthy growth prospects.

The stock of Hyderabad-based drug maker Natco Pharma is one such. After a stellar rally during 2013-15, the stock price has corrected by 20 per cent over the last six months.

The company disclosing that there have been a few minor observations by the US FDA at two of its plants in Chennai and Hyderabad affected sentiment. But given the good growth prospects driven by upcoming niche product launches in the US and pick-up in India, investors with a two-year horizon can buy the stock. The stock trades about 22 times its expected 2017-18 earnings, largely in line with other leading players such as Dr Reddy’s and Cipla.

Domestic oncology, hepatitis C portfolio and niche generic opportunity in the US are expected to drive Natco’s growth over the next two to three years. The company has a differentiated portfolio in the domestic market (52 per cent of consolidated revenue) and is a leading player in the oncology segment.

Its oncology portfolio of over 28 drugs caters to various types of cancer. This segment has been growing at a strong pace — revenue grew from ₹140 crore in 2011-12 to ₹253 crore in 2015-16. Besides, the company last year launched Hepatitis C (Hep C) drug Sofusbuvir which was in-licensed from Gilead Sciences Inc. Natco was the first one to launch the drug in India.

Later, in December 2015, the company launched one combination and other new Daclatasvir drug targeting Hepatitis C. A strong ramp-up in the sales of these three drugs provided a leg-up to the company’s performance in 2015-16. The portfolio is expected to sustain good growth in 2016-17 as well.

Besides the large opportunity in India, Natco also has entered into an agreement with Gilead to sell the drug in 101 developing countries that have over 100 million patients. So far, registration has been completed in 23 countries. Approval and launch in these markets, when it happens, should further boost Natco’s prospects.

US market opportunity

In addition to the domestic market, the US market presents significant opportunity for the company. The company’s portfolio of niche high-potential opportunities in the US includes generic versions of flu drug Tamiflu (expected to be launched before February 2017), long awaited multiple sclerosis drug Copaxone 20mg (partnered with Mylan) and Crohn’s disease drug Entecort. These should lift Natco’s revenue and profit over the next 2-3 years.

The company has filed over 38 generic drugs in the US and plans to file 6-7 products in 2016-17. Other opportunities in the US in the long term include multiple myeloma drug revlimidanti-cancer drug Gleevec and multiple sclerosis drug Gilenya.

Though the company has built an impressive portfolio in India and the US, timely approval for these drugs will be critical to sustain growth momentum. While Natco’s management is confident that the US FDA’s observations at its two plants are minor and will not impact performance, any adverse move by the FDA can hurt growth prospects.

Natco’s revenue grew 38 per year-on-year in 2015-16 while operating profit rose 26 per cent.