Natco Pharma Ltd: For healthy gains
(BSE Code: 524816) (CMP: Rs.788.10) (FV: Rs.2)
Hyderabad-based Natco Pharma Ltd (NPL) was incorporated in September 1981 by V. C. Nannapaneni, Chairman & Managing Director, to manufacture conventional and time-release dosage forms of life-saving drugs with an initial investment of ~$54,954. Currently, it has 5 manufacturing facilities in India with 2,500 employees and dedicated modern research laboratories. It is well recognised for its innovation in pharmaceutical research and development (R&D). At present, it has 66 Indian and international granted patents. Further, it has filed for 41 Indian and 85 international applications. It has 6 overseas subsidiaries.
NPL has 5 formulation units across India – 2 in Dehradun (Uttarakhand), 1 in Kothur (Telangana), 1 in Nagarjuna Sagar (Telangana) and 1 in Guwahati (Assam). It has 2 chemical manufacturing units – 1 in Mekaguda (Telangana) and 1 in Manali (Chennai). Its R&D facility ‘Natco Research Center (NRC)’ is located at Sanathnagar in Hyderabad. Its manufacturing plants are spread across India and certified by stringent global regulatory authorities. NPL has a well-established presence in the gastro hepatology segment. It is a market leader of Hepatitis C drugs in India. It launched generic Sofosbuvir and its combinations for the treatment of Hepatitis C under the following brands: Hepcinat Hepcinat LP, Velpanat and Natdac. Further, it diversified its product portfolio by launching products in the Cardiology and Diabetology therapeutic areas.
NPL exports its products to 40+ countries globally. Key geographies include India, North America, Latin America, Asia Pacific, South East Asia and the Middle East. Through its partnership driven model, its exports are primarily carried out by out-licensing products to multinational companies and also those companies with strong local/ regional presence in the respective geographies.
NPL derives 42% of its revenue from its international formulations, 42% from its domestic formulations, 10% from APIs and 6% from others. On the exports front, USA will remain a key long-term driver based on its strong complex FTF/Para IV filings. Exports constitute ~36% of sales.
NPL is a leading domestic player in the oncology space. It derives 35-40% of its sales from the oncology business (both APIs and formulations). Its product pipeline consists of drugs, which are used for various types of cancer like blood cancer, breast cancer, brain cancer, ovarian cancer, lung cancer and prostate cancer.
In 2018, NPL launched its first generic version of Oral tablets for Multiple Sclerosis in India and announced USFDA filing for its Sofosbuvir tablets (400 mg). Also, the inspection of its Mekaguda API facility was completed with zero
observations. It executed 5-6 filings in Brazil and plans to launch 6-7 products in FY19. The management plans to focus on the tender business.
In domestic formulations, NPL is focused on oncology and CnD (cardiology and diabetology). It has expanded its oncology product range from 6 in FY04 to 30 where 6 brands have more than $100 mn revenue. In CnD, it aims to launch products and create brands. It has a royalty base agreement with Gilead Sciences and Bristol Myers Squibb to supply the generic version of hepatitis C medicines in India and other developing countries. The management believes that the price erosion in the Hep C range has almost bottomed out in India and it expects pricing in this segment to be maintained at the current level.
For FY18, NPL reported 43% higher PAT at Rs.695.2 crore on
8% higher sales of Rs.2184.8 crore with an EPS of Rs.39.26 and a dividend of 412.5% was declared. During Q1FY19, it reported 94% higher PAT of
Rs.181.6 crore on 26% higher sales of Rs.538.6 crore and an EPS of Rs.9.8.
With an equity capital of Rs.36.9 crore and reserves of Rs.3035.3 crore, NPL’s share book value works out to Rs.166.52. Debts amount to Rs.173 crore whereas cash, investments and loans given are Rs.1063 crore. The value of its gross block including Rs.480 crore of capital work-in-progress is Rs.1888 crore. The promoters hold 48.4% of the equity capital, foreign institutions hold 25%, DIs hold 6.3% and PCBs hold 2.6%, which leaves 17.7% stake with the investing public.
In December 2017, NPL had raised Rs.915 crore through issue of securities to qualified institutional investors. It allotted
1 crore shares at Rs.915/share. Recently, it received environment clearance for its Rs.480 crore expansion project in Telangana which would generate 1,500 jobs.
The proposal is to expand the production capacity of 66 APIs and API intermediates at a time from 115.5 TPA to 645 TPA.
The expansion will not only increase the market availability of its therapeutic drugs but also reduce the import burden on the country. NPL plans to invest around Rs.100 crore in addition to the existing investment of Rs.86.82 crore in the facility to manufacture 16 campaign products at a time out of 42 API products and R&D activity, with a production capacity of 66.32 TPA (existing production capacity is 46.27 TPA).
The Indian pharmaceuticals market is expected to grow at 22.4% CAGR to $55 bn by 2020. By then, India is likely to be among the top three pharmaceutical markets by incremental growth and sixth largest market globally in absolute size. The Indian pharmaceutical market is expected to grow to $100 billion by 2025, driven by increasing consumer spending,
rapid urbanisation and raising healthcare insurance. India’s pharmaceutical exports are expected to grow to $20 billion by 2020 from $17.27 billion FY18.
New product launches in the Hepatitis C basket have helped NPL become a market leader in India. It invests 6-8% of its turnover in R&D each year. It has made significant additions in analytical and manufacturing capabilities. The management believes that NPL has a few large one-off opportunities in USA over the next few years. It expects approval momentum to tick in Brazil from FY19E onwards. Going ahead, the management plans to focus on India, Brazil and Canada while focussing on other niche areas. Its Canada business has a turnover of Canadian $15 million and is profitable. Its Vizag manufacturing facility will become operational by the end of H1FY19E. Considering NPL’s strong oncology portfolio, focus on niche product opportunities, healthy balance sheet, sharp focus on complex filings in USA, its extensive focus on India, Brazil and Canada markets, NPL is set to notch an EPS of Rs.43 in FY19 and Rs.46 in FY20. At the CMP of Rs.788.10, the stock trades at a forward P/E of 18.32x on FY19E and 17.13x on FY20E earnings. A reasonable P/E of 18.55x (industry P/E is 32.76x) will take its share price to Rs.968 in the mediumterm and Rs.1035 thereafter.