Natco Pharma Ltd: For healthy gains

Money Times - - NEWS - By Vi­hari

(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.

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