How Far Is Natco’s Turnaround?

Natco Pharma Ltd. lost more than half of its value in the last two years as lack of new launches and the company’s inability to capitalise on exclusivity of its crucial flu drug in its largest market spooked investors. And the drugmaker’s next big product will not hit the shelves before three years.The Hyderabad-based company’s profit and revenue growth slowed in the few quarters after it lost exclusivity in the U.S. of generic Tamiflu—used to treat influenza—and rising pricing pressure in the domestic Hepatitis C segment. Also, Natco Pharma’s partner Mylan cut prices for multiple sclerosis drug Copaxone to grab higher market share from innovator Teva, further hurting margin.Once an outperformer, Natco Pharma’s stock tumbled 20 percent from the start of the year compared with an 8 percent decline in the Nifty Pharma Index. The drugmaker has lost more than 50 percent from its peak in 2017..Natco Pharma in a conference call said the contribution of Tamiflu, used to prevent a disease that kills as many as 650,000 people worldwide in its seasonal form, would further shrink in the ongoing financial year. Launched in December 2016 in the U.S., Tamiflu’s market size fell from $500 million to $100 million as five-six companies now sell the drug, according to IMS.That’s not all. Natco Pharma’s inability to scale up the market share of Copaxone also hurt its financials, according to Vishal Manchanda, pharma analyst at Nirmal Bang. The steep erosion in the drug’s price wasn’t expected, he told BloombergQuint. Copaxone was launched in the U.S. in September 2017 with a market size of $3 billion, IMS data showed. That has now dropped to $800 million as three drugmakers entered the market.Yet, the company is optimistic citing a strong pipeline of niche generic product launches for the U.S. in the coming years. That includes Revlimid (cancer), Nexavar (for kidney, liver cancer), Afinitor (for renal cancer and to prevent transplanted organ rejection) and Imbruvica (for cancer), it said in an emailed response to BloombergQuint.Of these, Revlimid—used for treating anemia and multiple myeloma— provides a big opportunity as it has sales in excess of $5 billion in the U.S. But the launch will only happen by March 2022..The company also reiterated the targets and estimates announced in its conference call after the fourth-quarter earnings:7-8 percent rise in its overall revenue for the financial year ended March 2020; profit growth of 8-10 percent.Revenues from emerging markets, including India and subsidiaries in Canada and Brazil, to double by FY22.The company expects its sales to rise 15-20 percent in India and 13-14 percent in Brazil and Canada during 2019-20.India business will be aided by eight to 10 launches and three-four in Brazil and Canada in the fiscal.Profit to growth 8-10 percent and revenue 6-8 percent from FY19 to FY20.Expects the agrochemicals business where it invested Rs 100 crore to contribute to its overall revenue..Analysts aren’t that optimistic.Anand Rathi’s research analyst Rashmi Sancheti expects its revenue over financial years 2019-2021 to remain flat due to high base of Tamiflu. IDFC’s Nitin Agarwal said the company’s inability to ramp up Copaxone’s profit share will reflect in the first quarter..The expectations of tepid earnings growth prompted Edelweiss to cut target multiple for Natco Pharma from 20 times to 16 times..Still A ‘Buy’.14 of the 15 analysts covering the stock recommend a ‘Buy’, while one suggests ‘Hold’, according to Bloomberg data. The consensus target price shows a potential upside of 30 percent for the stock. That’s largely because the stock has been beaten down.JM Financial, which initiated coverage on Natco Pharma with a ‘Buy’, said at 40 percent discount to its five-year average, the risk-reward ratio is extremely favourable. Anmol Ganjoo, vice president (research) at the research firm, has a target of Rs 640.IDFC Securities and Jefferies remain most bullish with target prices at Rs 888 and Rs 850 apiece. While Jefferies said the stock at current prices is valuing the base business at 22 times price-to-earnings of FY20 with no value to the U.S. business, IDFC said earnings have bottomed for the company.

How Far Is Natco’s Turnaround?

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