Natco Pharma: Overview, Share Price, and Fundamental Analysis
Company Background
• Natco Pharma Limited (Natco) is a vertically integrated pharmaceutical company with a strong focus on R&D.
• Founded in 1981, NATCO has emerged as an established pharmaceutical company with a presence in formulations and APIs, in both domestic and international markets.
• Its expertise lies in the development, manufacturing, and commercialization of complex pharmaceuticals. It’s a well established player in Oncology with brands catering to diseases including bone, breast. Lung and ovarian cancer.
• The company has also set up an agrochemicals facility in Nellore (Andhra Pradesh) to diversify its portfolio.
• It owns 9 manufacturing facilities, 5 for formulations, 2 for API business, 2 for agrochemicals, and 2 R&D centers in Telangana.
• As on Dec, 2023, 49.71% of the company’s shareholding was held by the promoter group, with the rest held by various institutions and the public.
Key Business Segments
• As an early entrant with strong R&D capabilities, Natco has established itself as a leading player in the oncology segment in India. In addition, it generates a sizeable proportion of its formulations business from exports.
• It enjoys a presence in the generics business in the regulated markets of North America and Europe and branded generics in the rest of the world (RoW).
• Following are some of the key details of its four major business segments:
Natco Pharma Financial
• Natco Pharma has delivered significant growth in Revenue and PAT from FY23 onwards after almost five years of no growth in topline and consistent fall in PAT (from FY17 to FY22).
• Revenue growth in recent quarters has been contributed mainly by increase in export formulations business from a low base and ramp up in the Crop Protection business.
• Margins have also inched upwards mainly due to contribution from Revlimid (a cancer drug), new launches and reduced pricing pressure in the US.
Management Commentary for future
• Revenue & PAT: Management has given revenue guidance of INR 40 bn and PAT of INR 12 bn plus for FY24.
• Revlimid – Management expects healthy meaningful revenue from Revlimid to continue until Q3/Q4FY26.
• US FDA Update on Kothur – In Oct 2023, the Kothur plant was inspected by the USFDA. On 8 Nov 2023, the company reverted to USFDA with remediation plans. 90 days from thereon, the USFDA should have reverted with their take on remediation. The
company, thus still awaits any communication from the USFDA. The downside risk is limited as Revlimid (except 2.5mg and 20mg) has been filed from multiple plants.
• Domestic business – The company is planning for several new launches in the oncology space. Until then the business is expected to be stable with 10- 12% growth. The company is looking out for acquisition but depends on the valuation being sought.
Valuation
• Given the strong entry barriers and complex product pipeline in the US along with growth in domestic, API, and agrochemical businesses we feel Natco is well-poised to deliver revenue/EBITDA/PAT to grow at a CAGR of 20%/23%/23% over FY23-26E.
• This strong performance is led by 1) Revlimid sales for the next two years, 2) expansion into newer geographies by leveraging the existing product basket in multiple geographies, 3) steady growth in domestic business, and 4) growth in
agrochemical and API businesses.
• The stock currently trades at a TTM P/E multiple of 14.2x, which is at a significant discount to the 10 year average P/E of 33x. We believe that with the improvement in performance the stock deserves a re-rating and should atleast trade closer to its
10 year P/E of 33x.
• We therefore foresee more than 2.5x expansion in the P/E ration along with a reasonable growth in the EPS as well. Due to the combined effect of P/E re-rating and EPS growth, we believe that the stock has potential to rise 3x from the current price and we believe the stock can reach a target of INR 2500 per share by end of FY26.
Conclusion: We recommend a BUY rating on the stock with a target price of INR 2500 and we expect this price by end of FY26.
Key Risks
• High product concentration: The company derives majority of its US formulation revenues from gRevlimid, gCopaxone, gFosrenol, gTykerb, gTamiflu, gDoxil, gAfinitor and gZortress. The top five products accounted for ~45% of the company’s domestic formulations business.
• Increasing competition in key markets – High competitive intensity leading to pricing pressures along with relatively high base of Covid-led supplies during Q1 FY2022 led to contraction in Natco’s revenues from the domestic market in 9M FY2023.
• Exposure to regulatory risks and litigations – Natco is exposed to increasing regulatory scrutiny, compliance costs and risks associated with the same. Further, the company has ~50% of its domestic formulation products covered under NLEM, which though has benefitted from the 10.7% increase in prices allowed for FY2023, remains exposed to future price control measures or addition of more products in the list of NLEM drugs.
