Edel Investment Research BUY Natco Pharma Ltd : Company Update
Growth triggers: diversification, high-value pipeline CMP: INR 788 Target Price: INR 995
Neha Agarwal Natco Pharmaceuticals (Natco) is a R&D focused player with strong focus on oncology and hepatology. Research Analyst The company is a market leader in the domestic generic oncology space with 23% market share. Although +91-22-4272 2684 its domestic business remains a cash cow, we envisage its US business, wherein it has some very [email protected] interesting niche filings, to be a major growth driver. This could aid the company deliver extraordinary growth and cash flow over the next several years. Additionally, expansion in new lucrative therapies such as cardiology and diabetes on the domestic front and geographical expansion in developing markets are bound to sustain Natco’s long-term narrative. We believe management’s strong focus on R&D and emphasis on difficult-to-manufacture products will contribute substantially to the company’s growth and margins, and the stock will continue to command a premium in the pharma space. We initiate coverage Bloomberg: NTCPH:IN with ‘BUY’. Robust domestic portfolio, expansion in lucrative therapies to sustain growth momentum 52-week range (INR): 794 / 390 Natco’s domestic revenue has catapulted 5x over the past 4 years ending FY17 driven by its robust oncology and Hepatitis C product portfolio. Moreover, anticipated launch of the latest Hepatitis C drug (Epclusa) in Share in issue (Crs): 17 India in H1FY18 along with expansion of its domestic market presence with introduction of specialised M cap (INR Crs): 13,843 products focused primarily on diabetes and cardiology are additional sweeteners. Anchored by these potent catalysts, the company envisages its domestic business to scale up rapidly and clock INR1,000crore annual Avg. Daily Vol. BSE/NSE (‘000): 35 revenue by FY18 end. Developing market expansion to enhance revenue The company has already made filings in over 22 developing countries (of the over 100 countries) in which it holds licences to market Gilead’s Hepatitis C portfolio. We anticipate humungous growth opportunity for Natco as 86% of Hepatitis C cases in these developing markets are unattended. Additionally, post setting up of its front-end presence in these countries, the company has the option of introducing its oncology line, SHARE HOLDING PATTERN AS ON which could further burnish its prospects. Ergo, we estimate developing markets to contribute up to INR260crore to its FY19 top line. Niche opportunities in US to deliver extraordinary growth Natco has a strong US pipeline including multi-billion dollar opportunities such as Copaxone and Revlimid. Further, consistent realisations from pipeline drugs such as gTamiflu capsule, Budesonide and Armodafinil Promoter, in FY17 will help the company sustain over 25% average annual growth. With 75-days of exclusivity and 40- Public, 48.8 51.2 45% price erosion, the company has captured 80% of gTamiflu market, adding an estimated 22% to FY17 top line. Moreover, with an estimated ~7 launches over the next 6-15 months in US, including gCopaxone 20mg (& probably 40mg launch), gTracleer, gVidaza and gFosrenol, Natco is poised for an eventful FY18 and FY19 in international markets. Post factoring in competitive intensity in its product pipeline and uncertainty associated with their marketing approvals, we have valued the overall US opportunity pipeline at INR404/share. Valuations In our view, Natco is headed for exciting times ahead, with multiple launches lined up in the US, EU, India and developing markets. Ergo, we expect stable cash flows, margin improvement and steady growth in the 160 domestic market. Our earnings estimate for FY17, FY18 and FY19 are INR22, INR31 and INR33 per share, 140 respectively. We value the company’s base business at 18x FY19E earnings of INR32.8/share, while the expected launches in the US & EU are valued at INR404/share. We maintain our “BUY” recommendation on 120 the stock, with a target price of INR995/share. 100 80 Year to March (INR cr) FY15 FY16 FY17E FY18E FY19E Revenue 840 1,142 1,836 2,434 2,584 60 Revenue Growth (%) 11% 36% 61% 33% 6% 40 EBITDA 227 270 565 799 848 16 16 16 16 16 16 16 16 17 16 16 17 16 16 ------Net Profit 164 155 375 541 571 Jul Jan Jan Jun Oct Apr Feb Sep Feb Dec Aug Nov Mar May Profit Growth (%) 33% -5% 142% 44% 6% Natco Sensex Shares Outstanding (cr) 17 17 17 17 17 Diluted EPS (INR) 9 9 22 31 33 EPS Growth (%) 33% -5% 142% 44% 6% Diluted P/E (x) 92.4 88.5 36.6 25.4 24.0 EV/EBITDA (x) 61.7 51.2 24.5 17.0 15.5 Date: 22nd March 2017 RoE (%) 21% 14% 25% 28% 23% RoCE (%) 18% 18% 32% 36% 30%
1 Edel Invest Research
Natco Pharma Ltd.
Focus Charts
Growth trajectory of domestic oncology to remain steep Considerable Hepatitis C opportunity in developing markets
Natco's domestic oncology portfolio FY04 6 products 10.3 cr FY09 19 products FY13-16 20-25 products 436 In developing countries
16 cr Chronic Hepatitis C 7%
(INR cr) (INR 253 patients Gilead’s reach 195 164 140 84% opportunity
untapped 7%
Local manufacturers 2012-13 2013-14 2014-15 2015-16 2018-19 P
New therapy areas to top up existing revenues Niche pipeline adds to base business valuations
Clinidipine 1200 and combinations 150 1000
Ivabradine 800 600 Cardiology 100 Bosentan 400
(INR/share) 200 0
(INR cr) (INR
Teneligliptin and Total combinations
gGleevac gTracleer gRevlimid Other launch launch Other opportunities gDoxil) gCopaxone 40mg gCopaxone 2017-18E 2018-19E
gCopaxone 20mg and and 20mg gCopaxone Base business (including (including business Base
Soaring R&D spending in niche areas to help sustain revenue growth Capex expected to convert into better returns 1400 40 1200 7 1200 35 1000 6 30 5 1000 800
25 4 800 600 20 (%) 3 %) (in (INR cr) (INR 600
400 cr) (INR 2 15 400 200 1 10 0 0
200 5 10 11 13 14 15 16 ------12E
- 0 -
10 11 13 14 15 16 2009 2010 2012 2013 2014 2015 ------12E 17E 18E 2011 - - - Net revenue R&D as % of sales (RHS) 2009 2010 2012 2013 2014 2015 2011 2016 2017 Gross block ROCE (in RHS) Source: Company, Edel Invest Research
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Natco Pharma Ltd.
The future performance of Natco will reflect fruits of its core research and development strategy over the past decade. Several favourable tailwinds such as strong positioning in domestic market segments, diversification along therapy areas as well as geographically, and low-competition high-margin product pipeline in the US can pave way for strong upswing in its revenues. Topline growth of 31% coupled with significant operating margin improvement should result in a high 54% CAGR bottomline growth from FY16 toFY19E and will support high multiple.
Niche capability, strong Backward integration and domestic distribution, and High capacity addition and high margin portfolio front-end partnerships improved cash flows to potent bottom-line with leading global generate strong returns boosters players
FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E Multiple Price Target 18x P/E Revenue 1,142 1,836 2,434 2,584 995 RoACE (%) 14.4 25.3 28.2 23.3 Natco 22x P/E 1,126 EBITDA 270 565 799 848 CFO 102 280 414 604 EBITDA 23.6% 30.8% 32.8% 32.8% Margin
PAT 155 375 541 571
PAT CAGR of 54% over FY16-FY19E on US product pipeline Entry = INR 788 existing business and valuation of definite launches INR404/share
Total Return of 27%
3 Edel Invest Research
Natco Pharma Ltd.
gRevlimid
(40 mg) (40
gCopaxone
206
gGleevac
gTracleer
gGilenya
99
Future
37
Pipeline
18
(Value/share)
6
C
moderate growth
API withsales
to resume resume to inflows from
New capacityNew addition
consumption
to increase increase to in captive
Lower realisations due
192
FY19E
(expansion
129
FY18E
API (14%) API
45
165
FY19E
with Hep-C and and Hep-Cwith
markets
portfolio portfolio these in
existing domestic existing
expansionwith
be fuelled fuelled be by
Further growth Further could
developingmarkets
portfolio portfolio launchin
Expansionwith Hep-
Domestic
32
ROW ROW
other core offerings) core other
FY17E FY17E
24
139
FY16 FY16
486
FY19E
31
191
International
FY13
(INR cr) (INR 203
FY16 FY16
Other US US Other
up strong strong upbase
competition competition has set
pipelinewith limited
Strongproduct
point of of concern point
pipeline to remain pipelineremain to a
erosion in erosion existing
Moderate price Moderateprice
FY18
to be to launchedin
andgDoxil expected
gCopaxone 20mg
103
FY13 FY13
Portfolio (12%) Portfolio
179
FY19E
209
FY18E
gTamiflu
~$450mn ~$450mn FY17 in
FY18 against FY18
shrink to shrink$300mn in
opportunity size size opportunityto
competition, competition,
With growing growing With generic
erosion
marketwith 43% price
gTamiflu gTamiflu capsules
Captured 85% of Captured85%of
439
FY17E FY17E
International(18%)
Story in a Nutshell in a Story
191
FY19E
(3%)
41
FY16 FY16
Others Others
26
filings
evolve along evolvealong niche
Future portfolio Futureportfolio to
combinations
andTeneligliptin
drugs like like drugs Clinidipine
Entered with me-too
portfolio portfolio launch
cardiology cardiology diabetic &
Growth along Growthalong
FY13 FY13
Formulations (73%) Formulations
527
FY19E
343
FY16
Domestic (55%) Domestic
years
erosion in erosion the 2 past
Over 50% Over price
with over10 players
growing growing competition
launch in FY18 FY18 in launchdue to
to limit limit to post Epclusa
Domestic Domestic opportunity
Hep C(30%) Hep
FY13 FY13
426
FY19E
253
FY16 FY16
(22%)
Others (13%) Others
Oncology Oncology
channel
Strong distributionStrong
total cancer totalcases)
lung cancer lung (15% of
targeting targeting breastand
of NPL in of solid tumors
Increasing presence Increasingpresence
market
coverage coverage expandto
higher insurance higher
Rising diagnosis diagnosis Rising and
140
FY13 FY13
(INR cr) (INR
4 Edel Invest Research
Natco Pharma Ltd.
I.) Oncology: Top line backbone Domestic oncology industry (22% of revenue) AIOCD AWACS estimates peg the domestic oncology segment at INR2,150 crore (MAT value for December 2016), growing at a robust 14% annually for the past two years. The domestic industry can be broadly sub- segmented into hematology and solid tumours.
Hematology Solid Tumors
Cancer that begins in blood-forming tissue, such Growth of abnormal lumps of cells in different as the bone marrow; also known as blood organs which hinder functioning; when cancer malignant, they are called cancers
Examples include leukemia, lymphoma, multiple Named after organs they impact such as lung myeloma cancer or breast cancer
Key drugs - Bortezomib, Imatinib Mesylate - Key drugs - Paclitaxel, Gefitinib, Trastuzumab, contributing more than 55% to Natco's Oncology Erlotinib - contributing about 40-45% to Natco's portfolio oncology portfolio
With diagnosis expected to improve… …industry to grow in double digits
1. Rising diagnosis 71 2. Better access to therapies 3500 3. Higher insurance 3000
42 2500
2000
21 cr) (INR 1500 12 1000
500
2016 E 2020 P 0 2016 E 2020 P Cancer cases in India Number of cases diagnosed
Source: Indian Council of Medical Research (ICMR), Edel Invest Research
Natco: the market leader in domestic oncology segment Others, 21% IPCA Labs, 3% Natco Pharma, 23%
Biocon, 4% Dr. Reddys Labs, 15% Panacea Biotec, 5%
Emcure Pharma, 5%
Zydus Cadila, 13% Fresenius Kabi India, 6% Intas Pharma, 6%
Note: Only companies above 2% market share are mentioned; ‘Others’ include Pfizer, RPG LifeSciences, Cipla, Sun Pharma and Roche (Innovator) with market share of less than 2% each Source: AIOCD AWACS, Edelweiss Research
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Natco Pharma Ltd.
Oncology comprises one-fifth of Natco’s top line...
Others, 60% International Domestic formulations and Formulations, 0.5 API, 0.5 Onco- logy, 40%
Source: Company reports, Edel Invest Research
Natco’s debut in oncology in January 2003 was via launch of generic version of Imatinib Mesylate—a life saving drug used in the treatment of chronic myeloid leukemia (CML) under the Veenat brand. Over the past 4 years, the company’s oncology revenue has outstripped the domestic oncology market with expansion of its portfolio via drug additions as well as enhancing depth through effective distribution channels.
Though the company is present prominently in haematology, it is also increasing presence in the solid tumours segment targeting breast and lung cancers (together, breast and lung cancer constitute 18% of cancer cases in India).
.....with growth to continue at a staggering pace
Natco's domestic oncology portfolio FY04 6 products FY09 19 products FY13-16 20-25 products 436
(INR cr) (INR 253
195 164 140
2012-13 2013-14 2014-15 2015-16 2018-19 P
Source: Company reports, Edel Invest Research
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Natco Pharma Ltd.
II.) Hepatitis C: The long-term growth narrative (30% of revenue) Hepatitis C is a viral infection of the liver which has impacted 16crore people globally with more than 60% being in low and middle income countries. It could be acute as well as chronic in nature with acute cases falling in the low-risk category. However, up to 85% patients are diagnosed with chronic infection, which if left untreated for several years, could lead to liver cancer and cirrhosis. Despite high prevalence of the disease, most people infected with the virus remain unaware of the infection resulting in 7lakh death cases annually.
16 crore Hep C cases
63% Acute 90 Lakh 25% Of detected chronic cases cases found Chronic in India to be chronic 75%
Source: Edel Invest Research
Evolution of treatment options Initially, a few treatment options were available for Hepatitis C, which were characterised by low efficacy and high side effects. In December 2013, Gilead Sciences (Gilead) made a breakthrough in the treatment of Hepatitis C with the launch of its nucleotide polymerase inhibitor sofosbuvir (Sovaldi), followed by the launch of its combination drug Harvoni (sofosbuvir + ledipasvir) in October 2014.
Efficacy comparison between different Hepatitis C drugs
Pegylated interferon + Protese inhibitors Sofosbuvir and its ribavarin (up to 2011) (2011 onwards) combinations (from 2013)
Cure Rate 40-50% ~75% 90-95%
Treatment duration 48 weeks 48 weeks 12/24 weeks
High-with use of High-with use of Low-without Side-effects interferon interferon interferon
Source: Edel Invest Research
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Natco Pharma Ltd.
Due to its distinct advantage over existing treatment options, there was significant increase in its penetration despite high prices (USD84,000 for Sovaldi and USD94,500 for Harvoni for a 12-week course). This was evident from rising penetration of treatment from 3% of the diagnosed population in 2013 to 9% in 2015 in the US.
Significant uptick witnessed in number of Hepatitis C cases treated 4500 4500 (February 2015) 4.1M (October 2013) ~4.0M 4000 4000 3500 3500
3000 3000 2500 2500
2000 1.7M 2000 1.6M 1500 1500 Patients in (000's)in Patients (000's)in Patients 1000 1000
500 58 500 140 0 0 Prevalence Diagnosed Treated Prevalence Diagnosed Treated
Source: Company reports, Edel Invest Research
Emerging market opportunity Natco received the license to manufacture and market Gilead’s Hepatitis C medicines portfolio of Sofosbuvir, the combination drug Sofosbuvir+Ledipasvir, and Daclatasvir in 101 developing countries. In return, they would pay royalty of about 7% to Gilead on sales.
Cumulatively, these countries have an estimated 10.3crore Hepatitis C cases, accounting for 64% of the total diseased population. With Gilead having reached only 0.73crore (7%) of such population and local pharmaceutical companies addressing another 7%, 86% of the Hepatitis C cases in developing markets remain open for these companies to cater to.
High prevalence of Hepatitis C cases in developing markets
10.3 cr
In developing countries 16 cr Chronic Hepatitis C 7% patients Gilead’s reach
84% opportunity
untapped 7%
Local manufacturers Prevalence of Hepatitis C High: >3.5% Moderate: 1.5-3.5% Low: <1.5% Source: Edel Invest Research
Factors bolstering Natco’s lead 1. First-mover advantage: Natco is among the first generic manufacturers to launch Gilead’s Hepatitis C portfolio in India, giving it a substantial market share of over 40%. 2. Natural entry barrier: Natco sources API for Sofosbuvir from a third party API manufacturer Laurus Labs with exclusive partnership, while the finished product is manufactured in Natco’s plants at multiple locations in India—Kothur (Telangana), Guwahati and Dehradun. This provided the company exclusive access to large volumes of API, while others either sourced it from Natco or took time to develop the API for captive consumption, creating a natural entry barrier for other potential entrants.
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Natco Pharma Ltd.
Hepatitis C: While new players in the domestic block creep in sales.....
Source: AIOCD AWACS, Edel Invest Research
Despite subsequent entry of 7-9 players in the Hepatitis C drug market, Natco remains the undisputed leader with 39% market share. However, with rising competition and over 50% dip in prices since launch, further upside for this segment remains bleak. In fact, Natco’s realisations from the domestic Hepatitis C business are expected to see only 5% upside on an annual basis for FY18 and FY19 on back on Epclusa launch (last of Hepatitis C products licensed from Gilead) till the market settles to a sustainable price level.
….developing market opportunities to increase inflows from Hepatitis C exports
800
Indonesia 700 6% 600 Rest of the Pakistan world 500 35% 9% Key 400
Vietnam cr) (INR developing 300 markets 7% Other 34% Egypt 3% 200 developing 100 nations Ethiopia 31% 9% - 2016-17E 2017-18E 2018-19E
Sovaldi/Harvoni & Other Hep C (Brand) Hep C exports (Sovaldi)
Source: Company reports, Edel Invest Research
Among licensed countries for penetration, Indonesia, Pakistan, Vietnam and Ethiopia cumulatively account for one-third of the potential. Hence, Natco’s market share can catapult via quick penetration in these countries. Having filed for approvals in over 23 countries, Natco is estimated to quickly tap developing markets. However, with no local front end, revenue addition from these markets is likely to be sluggish.
9 Edel Invest Research
Natco Pharma Ltd.
III.) Diversification to cardiology and diabetes: New growth avenue Natco is looking to expand its domestic market presence with introduction of specialised products focused primarily on diabetes and cardiology. At the onset, the company has launched a me-too portfolio with compounds of Clinidipine and Teneligliptin, Bosentan and Ivabradine. Although Teneligliptin is an estimated INR1,200crore market, high price competition from Glenmark (60% price cut; from INR45 to INR20) followed by Cadila (another 65% price cut; from INR20 to INR7) has left the market with low margins. Further, prominent presence of over 10 players in Clinidipine renders the market highly competitive. Yet, large market size of these compounds gives a good entry point to Natco, which is targeting ~INR100crore annual revenues from the segment in FY18.
Revenues to top up by venturing into new therapy areas
Clinidipine 150 and combinations
Ivabradine
100 Cardiology
Bosentan (INR cr) (INR
Teneligliptin and combinations
2017-18E 2018-19E
Source: Company reports, Edel Invest Research
10 Edel Invest Research
Natco Pharma Ltd.
IV.) International generics Niche fillings in oncology marked Natco’s entry in the US market.
2007 Launched first ANDA in US (gZofran)
2008 Filed for first Para IV Certification (gCopaxone)
DEMAND is definitely NATCO 2010-11 there Made ANDA filings for gRevlimid ($ 6 billion) and gTamiflu ($440 million)
ANDA fillings: gVidaza ($ 236 mln); gGilenya($2.8 billion); gDoxil ($ 2012-15 202 ANDA fillings: gVidaza ($ 236 mln); gGilenya($2.8 billion); gDoxil ($ 202 million); gNexavar ($ 300 million) Settled for gTamiflu and gRevlimid launch in 2016 and 2022 respectively 2016 Received final approval for gTamiflu and tentative approval for gNexavar
Strong growth marked by niche launches in US
250 89% 100% 79% 90% 200 80% 65% 60% 70%
150 60% 45% 50% 33% (INR cr) (INR 100 40% 30% 50 20% 10% 0 0% 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
International formulations US portfolio as % of international generics
Source: Company reports, Edel Invest Research
Front-end partnership strategy helped de-risk litigation expenses Despite a strong US pipeline, most of Natco’s filings are via its front-end partners in the US such as Mylan, Lupin, Actavis and Breckenridge. While this strategy leaves the company with 30-40% share, there is no litigation risk. Considering that about 80% of the company’s product pipeline is under patent, we see this strategy by the company as a big positive with no requirement for contingencies. Going forward, the company is looking to increase revenue share by taking up some part of the litigation risk. Considering its historical success rate, this could add to Natco’s revenue at a low incremental risk.
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Natco Pharma Ltd.
Addressing some high-value opportunities a.) Tamiflu (anti-viral – Influenza A & B) Tamiflu is an anti-viral for the treatment and prevention of influenza A and B, with US sales of USD750mn (~60% capsule; 40% suspension). It was developed by Gilead Sciences, which granted Roche exclusive right to manufacture and sell Tamiflu worldwide. Flu or influenza being a seasonal outburst in the US, is looked at a seasonal level. Primarily, December- March are peak flu months.
Flu trend in the US market
Source: Edel Invest Research
Natco’s journey with Tamiflu so far
• Natco, with its • Natco received • US Supreme • Natco receives • Tamiflu's final patents front-end partner tentative Court denied final ANDA for both oral and Alvogen filed approval from US Gilead's filing to approval for suspension expires on ANDA FDA review Federal gTamiflu capsules the 23rd opening challenging Circuit's decision doors for all generic Tamiflu's Patent players 483 under Para IV
Feb-11 Mar-14 Mar-15 Aug-16 Feb-17 Feb -11 Dec-12 Mar-14 Apr-14 Mar-15 Dec-15 Aug-16 Dec-16 Feb-17 Dec-12 Apr-14 Dec-15 Dec-16
• District Court • Federal Circuit • Natco settles • Natco/Alvogen dismissed Natco's agreed that one of case with Gilead launched claims Tamiflu's earlier to launch gTamiflu in the US expiring patents gTamiflu before at ~43% price cut qualifies as an its final patent leading to ~85% obvious reference to expiry of Feb 2017 market share the Patent #483 set to expire on Feb 23, 2017
Source: Company reports, Edel Invest Research
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Natco Pharma Ltd.
Tamiflu sales fluctuate across seasons making it difficult to estimate future market size
250
200
150
100
(Millions) 50
0
2009 2009 2009 2010 2010 2010 2011 2011 2011 2012 2012 2012 2013 2013 2013 2014 2014 2014 2015 2015 2015 2016 2016 2016 ------01 05 09 01 05 09 01 05 09 01 05 09 01 05 09 01 05 09 01 05 09 01 05 09
CAPSULE ORAL SUSPENSION
Source: Edel Invest Research
With competition expected to hit prices, gTamiflu market is expected to shrink to ~USD300mn (including capsule and suspension) in FY18 season, reducing the opportunity size for Natco compared to FY17 season (~450mn capsule sales). This, coupled with lower market share, will restrict the drug’s contribution to Natco’s revenue to ~INR200crore in FY18 against an estimated INR440crore in FY17.
b.) Copaxone (Glatiramer Acetate) Multiple Scerosis (MS) is a USD15bn market globally with Copaxone being the leading drug with a market share of ~19%. Though the share has dipped over the past few years with the launch of competing products such as Tecfidera in 2015, the drug continues to maintain leadership in the global MS market.
Copaxone remains market leader despite stagnant sales
25
20
15
10 (USD bn) (USD
5
0 2009 2012 2016
Others Copaxone
Source: Edel Invest Research
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Natco Pharma Ltd.
Series of events delays and turns around Copaxone generic opportunity for Natco
Natco filled for gCopaxone 20 2009 mg with Mylan as a 2nd entrant; Sandoz/Momenta being the first Teva launched Copaxone 40mg with exclusivity up to January 2017 and shifted Jan patients to the 40 mg dosage 2014 (about 78% market shifted to 40mg by Dec 2016) Aug Natco/Mylan filed for 2014 gCopaxone 40mg Teva could restrict generic entry in 20mg through multiple 2015 case filings up to patent expiry in 2015 Sandoz/Momenta got approval for 20mg generic and adopted 2015 the profit route of reducing price by 15% and gaining 23% market up to Dec 2016 Natco/Mylan address US FDA queries on gCopaxone 20mg 2016 and await approval US District Court ruling in favour of Jan Natco/Mylan for gCopaxone 2017 40mg calling all patents (due to expire in 2030) invalid. Natco/Mylan await approval March of gCopaxone 20mg as well as 2017 40mg with shared FTF status in 40 mg along with 4 other filers
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Natco Pharma Ltd.
With 40mg taking over, Teva makes going tougher for generics While approvals are expected to come for Mylan in Q4FY17 (20mg), the shrunken market for the dosage makes 40mg approval more lucrative. Although the district court ruling has been in favour of Mylan, Teva is expected to move to higher courts. Considering this, post USFDA approval, Natco/Mylan will launch the drug, but at risk.
Sandoz/Momenta launch gives strategy cues for Natco/Mylan Considering low competition for Copaxone 20mg in the near term, Sandoz/Momenta opted for high margin strategy against high market share and captured 23% of Copaxone 20mg market with 15% price cut. On similar lines, we expect Natco/Mylan to operate at not more than 30% price erosion, capturing about 30% of the market.
Introduction of 40mg left little for Sandoz/Momenta’s Glatopa 5.0
4.0
3.0
2.0 (USD bn) (USD
1.0
0.0 2009 2010 2011 2012 2013 2014 2015 2016 Copaxone (40mg) Glatopa (20mg) Copaxone (20mg)
Source: Edel Invest Research
c.) Revlimid (Oncology – Multiple Myeloma) Revlimid, a multiple myeloma treatment, is the largest drug for Celegene with global sales of ~USD7bn and US sales ~USD4.4bn. It is covered by 22 patents listed in the orange book, last of which is expected to expire in April 2027.
Consistent uptick in Revlimid’s annual sales through a decade 20 80%
15 60%
10 40% (USD bn) (USD 5 20%
0 0% 2010 2011 2012 2013 2014 2015 2016 2017P 2018P 2019P 2020P 2021P 2022P
US International US share (RHS)
Source: Edel Invest Research
REMS model: Restricted distribution system makes it difficult to procure samples for ANDA Revlimid is sold in the US under a programme called “Revlimid REMS” (REMS = Risk Evaluation and Mitigation Strategy), to avoid embroyo-fetal exposure. Under this programme, the prescriber and the pharmacist need to get certified with Celgene to prescribe and sell the drug, respectively, and also patients need to enrol in the programme and agree to comply with the requirements of the Revlimid REMS programme.
As a consequence, the REMS model restricts the distribution system of the drug, thereby making it difficult for generic players to procure samples for conducting bioequivalence studies required to file ANDA.
15 Edel Invest Research
Natco Pharma Ltd.
Natco: First mover advantage in Revlimid
Natco/Alvogen enter into agreement with Celgene: - Volume limited license from Dec-15 March 2022 to January 2026 - Volume unlimited license from January 2026 onwards
Markman hearing - favoured March-14 Celgene but enough points for Natco/Alvogen to take the case forward
Celgene filed infringement case Oct-10 against Natco on 10 patents
Natco entered in an exclusive partnership with Watson-acquired Aug-10 Arrow and filed a Para-IV application for gRevlimid with US FDA challenging 18 patents
Further, in case any other generic player gets approval to launch of gRevlimid before Natco, the launch date for Natco will also be advanced. Certainty about launch, though in limited quantity, aids in realising higher value from Revlimid at INR206/share.
d.) Doxil (Oncology - Doxorubicin HCL Liposomal) Doxil is a USD335mn chemotherapy drug in the US. While doxorubicin HCL has been in the market since 1980, the Liposomal version was launched by Janssen R&D in 1995 and 2000 (higher strength) giving favourable toxicity profiles, better cardiac safety and less side effects, making it favourable for all patients, especially those with cardiac arrest risk.
With supply limitations, Doxorubicin HCL Liposomal has had a curvy ride over the past two decades
• Approved by US • US FDA approved temporary • Janssen took over a • US FDA approved FDA drug import of Lipodox portion Ben Venue's Ohio new manufacturers (uapproved generic of Doxil) plant for Doxil API for Doxil from Sun Pharma to address manufacturing post supply shortage approval from US FDA; the sterile filtration and packaging was done in J&J's plant
1995 2012 Dec-13 2015 2011 Feb-13 2014 2016
• Supplier Ben Venue • US FDA approved • Janssen increased • Janssen increased Labs temporarily shut Sun Pharma's Doxil supplies to supplies to >75% of its manufacturing ANDA for gDoxil >50% of pre- pre-shortage levels units due to quality shortage levels, and subsequently issues limiting thereby regaining gained significant supplies of Doxil in market share market share the market
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Natco Pharma Ltd.
In the two-player market with limited supply, significant opportunity awaits for Natco 400
300
200
(USD mn) (USD 100
0 2009 2010 2011 2012 2013 2014 2015 2016
SUN PHARMACEUTICAL INDUSTRIES, LTD JOHNSON AND JOHNSON
Source: Edel Invest Research
Natco has filed ANDA for gDoxil with its marketing partner Dr. Reddy’s. Several other players such as Teva and Actavis have also made filings, making it a potential 5-player market in the medium term. Yet, with the approval expected to come by FY18 and single-digit price erosion by Sun Pharma so far, Natco is in a good position to leverage on the opportunity.
e.) Gleevac (Oncology - Imatinib) Gleevac manufactured by Novartis is indicated for treatment of chronic myeloid leukaemia. Post generic entry in the drug from 2016, the market size fell by 13% with initial price erosion of less than 10%. However, as other generic players joined the market, the drug price eroded by ~40% by CY16 end still making a USD1.6bn opportunity for Natco. Yet, considering high generic filings for the drug, we expect limited opportunity gain with steep price erosion over the next 2 years. With an expected entry in FY19, we peg this opportunity at INR37/share.
Generic competitors took over 40% of Gleevac’s market share 2.5
2.0 Teva 1.6% 1.5 Sun Pharma (USD bn) (USD 1.0 32.2% Novartis Apotex 62.2% 0.5 3.7% Repacker 0.4% 0.0 2009 2010 2011 2012 2013 2014 2015 2016
Source: Edel Invest Research f.) Bosentan (Tracleer) Tracleer is the first Endothelin Receptor Antagonist (ERA) approved by the USFDA for the treatment of pulmonary arterial hypertension (PAH). The drug has an estimated market size of USD1.6bn. It had no generic competition in the US up to 2016 even after losing patent protection in 2015. However, it has faced severe competition in European markets and from alternate ERAs with the leading being Gilead’s Letairis. To protect its sales from generic competition, Acetelion launched Opsumit in the market as an upgraded drug for the treatment of PAH. Since its launch in October 2013, Opsumit has taken over Tracleer, contributing about USD1bn to the company’s revenue.
The arrival of Opsumit insulates Actelion against future lost sales from Tracleer because it offers solid efficacy, including a statistically significant 45% reduction in mortality events and a 50% reduced risk of PAH related deaths and hospitalization. Importantly, unlike Tracleer, Opsumit will not have a black-box warning against liver damage.
Considering the above scenario, the market opportunity for Natco in this drug is estimated at INR18.5/share.
17 Edel Invest Research
Natco Pharma Ltd.
V.) API to show steady growth API sales have historically contributed a substantial 34% to Natco’s revenues in FY13 with significant contribution from international sales. The company’s API exports are primarily focused on US, EU, Canada, Latin America, Middle East and South East Asia.
However, total API contributed ~14% to revenue in FY16, of which major contribution was from API exports (~12% of sales). Over the past 3 years, APIs revenue contribution has reduced with steep growth in formulations. Additionally, rise in captive consumption has reduced overall realisations from APIs. Natco currently has 33 DMF filings in the US and several more under development.
With API sales remaining range-bound, its contribution to revenue kept shrinking
300 40% 34% 35% 250 29% 31% 26% 30% 200 23%
25% 150 20%
(INR cr) (INR 14% 15% 100 10% 8% 8% 10% 50 5% 0 0% 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17E 2017-18E 2018-19E
API International API Domestic API as % of revenues (RHS)
Source: Company reports, Edel Invest Research
Going forward, Natco expects to maintain 9% growth in API exports, predominantly on account of augmenting capacities in API and formulation, which will include expansion as well as upgradation of existing facilities. The company is setting up a new facility in Vizag for the US market at a cost of INR150crore (for Phase I). It is also expanding API facilities in Mekaguda and Chennai along with its formulation facility at Kothur. It is also upgrading its facilities at Dehradun and Guwahati to keep pace with growth in the domestic business.
18 Edel Invest Research
Natco Pharma Ltd.
Financial Outlook Spurt in domestic and international formulations to boost revenue Natco’s revenue growth trajectory has been robust with a 5-year CAGR of 20% on account of steep growth in its oncology and Hepatitis C portfolio in the domestic market and its complex drug portfolio in international markets (largely US). Going forward, we expect growth to be led by international generic launches with support from steady growth in the company’s domestic portfolio.
Strong revenue growth due to higher inflows from International formulations 3000
2500
2000
1500 (INR cr) (INR 1000
500
0
10 11 12 13 14 15 16 ------17E 18E 19E - - - 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Domestic formulations International formulations Others
Source: Company, Edel Invest Research
Margin to expand riding improving product mix With improving product mix along niche formulations, Natco’s product pipeline is expected to contribute steeply not only its top line, but also to margins. Being an early entrant in drugs with patent expiries, the company is well placed to carve in high margins despite rising competitive intensity in international markets, especially the US.
1000 35 30 800 25 600 20
15 (%) (INR cr) (INR 400 10 200 5 0 0
10 11 12 13 14 15 16 ------17E 18E 19E - - - 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
EBITDA EBITDA Margin (RHS)
Source: Company, Edel Invest Research
19 Edel Invest Research
Natco Pharma Ltd.
Consistent increase in R&D indicates promising pipeline Natco’s R&D as a percentage of sales has increased from 2% to more than 6%, clocking robust 40% CAGR. We expect this spending to convert into a strong pipeline for the company, making it a long term growth player in the Indian pharmaceutical industry.
Growth in R&D/Sales from 2% to 6% levels
1200 7
1000 6
5 800
4 600 (in %) (in
(INR cr) (INR 3 400 2
200 1
0 0 2009-10 2010-11 2011-12E 2012-13 2013-14 2014-15 2015-16 Net revenue R&D as % of sales (RHS)
Source: Company, Edel Invest Research
Natco’s R&D spending is closer to the highest in industry
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0% 2012-13 2013-14 2014-15 2015-16
Ajantha Alembic Sun Pharma Lupin Glenmark Natco
Source: Company, Edel Invest Research
20 Edel Invest Research
Natco Pharma Ltd.
Capex expected to contribute to higher returns Natco has a capex plan of about INR260crore in FY17 on its Vizag facility to increase capacity and continue catering to direct API sales and captive consumption demand. Despite increasing gross block, we expect the company’s RoCE to rise to ~35% on back of high margin product launches expected in the US.
1400 40
1200 35 30 1000
25
800 20 600 (%) (INR cr) (INR 15 400 10 200 5 0 -
10 11 13 14 15 16 ------12E 17E 18E - - - 2009 2010 2012 2013 2014 2015 2011 2016 2017 Gross block ROCE (in RHS) Source: Company, Edel Invest Research
Operating efficiency to boost cash flows Steep growth in EBITDA is estimated to culminate into higher cash flow for Natco. Further, operational efficiency is reflected in significant rise in operating cash flows as a percentage of sales, which is expected to grow from the current 50% to beyond 70%.
900 90 800 80 700 70 600 60
500 50
400 40 (%) (INR cr) (INR 300 30 200 20 100 10 0 0 2010-11 2011-12E 2012-13 2013-14 2014-15 2015-16 2016-17E 2017-18E 2018-19E
EBITDA Cash flow from operations CFO as % of EBITDA
Source: Company, Edel Invest Research
21 Edel Invest Research
Natco Pharma Ltd.
Valuation Diversification across therapy areas in the domestic market, expansion across developing market geographies and multiple launches lined up in the US will drive earnings CAGR of 31% over FY16-FY19E. Ergo, we expect stable cash flows and margin improvement with promising product pipeline and in-line capacity expansion. Our earnings estimate for FY17, FY18 and FY19 are INR22, INR31 and INR33 per share, respectively. We value the company’s base business at 18x FY19E earnings of INR32.8/share, while the expected launches in the US & EU are valued at INR404/share. We maintain our “BUY” recommendation on the stock, with a target price of INR995/share.
Niche filling opportunities add to valuations above base business 1200
1000
800
600 (INR/share) 400
200
0
Total
gGleevac gTracleer gRevlimid gDoxil) gCopaxone 40mg gCopaxone gCopaxone 20mg and and 20mg gCopaxone Base business (including (including business Base
Other launch opportunities launch Other Source: Edel Invest Research
PE bands 900
800
700
600
500
400 (INR/share) 300
200
100
0 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17
5x 10x 15x 20x 25x Price
Source: Company, Edel Invest Research
22 Edel Invest Research
Natco Pharma Ltd.
Peer Comparison
PER EV/EBITDA P/Sales P/BV Company FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E Natco Pharma 92 32 29 23 54 23 20 16 13 7 6 5 12 8 7 5 Alembic Pharma 15 27 21 18 11 17 14 12 3 4 3 3 8 6 5 40 Ajanta Pharma 42 31 28 23 27 22 20 17 9 8 7 6 14 10 8 6
ROE (%) RoCE (%) Asset Turnover (x) Company FY14 FY15 FY16 FY14 FY15 FY16 FY14 FY15 FY16 Natco Pharma 19 21 14 20 18 18 0.7 0.7 0.7 Alembic Pharma 40 36 58 39 39 61 2.5 2.1 2.2 Ajanta Pharma 47 43 40 54 56 50 1.9 1.8 1.6
Sales Growth (%) EBITDA Margin (%) R&D/Sales (%) Company FY14 FY15 FY16 FY14 FY15 FY16 FY14 FY15 FY16 Natco Pharma 12 12 38 25 26 24 5.4 6.2 6.2 Alembic Pharma 23 10 53 19 20 32 1.4 1.8 1.2 Ajanta Pharma 30 22 17 31 35 34 5.0 5.4 6.3
23 Edel Invest Research
Natco Pharma Ltd.
Company Overview Natco, incorporated in September 1981 by Mr. V.C Nannapaneni, commenced operations as a contract manufacturer for various companies in the pharmaceutical industry including Ranbaxy Laboratories, Cadila, John Wyeth India, among others. The company has the distinction of introducing the time release technology in India and manufactured formulations in conventional as well as sustained release forms. By 1994, export of formulations accounted for 50% of the company’s turnover. In 1995, 3 group companies merged with the parent company to form Natco.
In a bid to diversify its operations, the company invested in various projects in the late 1990s, including a softgel plant in the US and stake in the Krishnapatnam Port project. These led to a disproportionate increase in debt and the company was soon forced to take drastic measures, including divesting stake in Natco Pharma USA and selling off its branded formulations division (40 products accounting for sales of INR53crore) to Sun Pharmaceuticals. These measures, along with a debt restructuring package from IDBI, helped the company turnaround—from a loss making entity to completely wiping out accumulated losses by 2003.
However, the turning point for Natco came in January 2003, when the company entered the oncology segment with the launch of the generic version of Imatinib Mesylate. This was followed by ZOLDONAT and LETRONAT tablets, both cancer therapy drugs. Today, Natco is the leader in the oncology space, with 30% market share in the domestic oncology segment.
While domestic formulations contribute 55% to the company’s revenue, international generics make up 18%. Natco has finished dosage manufacturing facilities in Kothur, Dehradun as well as Nagarjuna Sagar. The facility at Kothur has USFDA approval as well as approvals from regulatory authorities of Canada, Portugal, Greece & Germany and is used exclusively for exports to the US/European markets. The Dehradun facility is used for production of domestic formulations and is also being used for exports from 2012. The Nagarjuna Sagar facility is where majority of the contract manufacturing is undertaken.
Natco also manufactures bulk drugs, which account for 14% of revenue (12% international and 2% domestic). The company has 2 API manufacturing facilities—Chennai which is used to manufacture cyto-toxic APIs and Mekaguda which is used for domestic formulations as well as exports. It has established an R&D centre in Hyderabad for synthetic chemistry, biotech & fermentation and it also runs a chain of retail pharmacies in the US which contribute 9% to revenue.
Business Model
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Natco Pharma Ltd.
Management Profile Name Designation Description
Mr. V.C Nannapaneni is Natco’s founder and CMD since 1981. His educational qualification Mr. V.C. Nannapaneni Chairman & includes M.S. (pharmaceutical division). He has Managing Director 44 years of work experience and has previously worked with Time Cap Lab.
Mr. Rajeev Nannapaneni, son of Chairman and MD Mr. V.C. Nannapaneni, joined the company Vice Chairman & Chief in 2000. He holds a B.A. in Quantitative Mr. Rajeev Nannapaneni Executive Officer Economics & B.A. in History from Tufts University, USA. He has previously worked with Merill Lynch and Natco Systems LLC in USA.
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Natco Pharma Ltd.
Financials Income Statement (INR cr) Year to March FY15 FY16 FY17E FY18E FY19E Net revenue 840 1,142 1,836 2,434 2,584 Materials costs 242 341 487 597 634 Gross profit 597 800 1,350 1,837 1,951 Employee costs 137 187 210 278 295 R & D Expenses 13 15 28 35 37 SG & A Expenses 221 329 547 725 770 EBITDA 227 270 565 799 848 Depreciation & Amortization 47 51 61 73 81 EBIT 180 219 504 726 767 Other income 19 12 11 11 11 EBIT incl. other income 199 231 515 737 778 Interest expenses 32 23 12 12 12 Profit before tax 168 208 502 725 766 Provision for tax 4 53 128 184 194 Adj. Net profit 164 155 375 541 571 Reported Net Profit 164 155 375 541 571 Basic shares outstanding (cr) 17.42 17.42 17.42 17.42 17.42 EPS (Rs.) 9.4 8.9 21.5 31.0 32.8 Dividend per share (INR) 1.1 1.5 1.5 1.5 1.5 Dividend payout (%) 12.2% 16.9% 7.0% 4.8% 4.6%
Common Size Year to March FY15 FY16 FY17E FY18E FY19E Materials costs 28.9% 40.6% 57.9% 71.1% 75.5% Employee expenses 16.3% 22.2% 25.0% 33.1% 35.1% Manufacturing & Other Expenses 26.3% 39.2% 65.1% 86.3% 91.7% Research & Development Expenses 1.5% 1.8% 3.3% 4.2% 4.5% Depreciation 5.6% 4.5% 3.3% 3.0% 3.1% EBITDA margins 27.1% 23.6% 30.8% 32.8% 32.8% EBIT margins 21.4% 19.2% 27.5% 29.8% 29.7% Net profit margins 19.5% 13.6% 20.4% 22.2% 22.1%
Growth Ratios Year to March FY15 FY16 FY17E FY18E FY19E Revenues 10.6% 35.9% 60.8% 32.6% 6.2% EBITDA 13.7% 18.7% 109.6% 41.4% 6.2% PBT 8.7% 24.1% 141.6% 44.2% 5.7% Net profit 32.6% -5.2% 141.6% 44.2% 5.7%
26 Edel Invest Research
Natco Pharma Ltd.
Balance Sheet (INR cr) As on 31st March FY15 FY16 FY17E FY18E FY19E Equity capital 33 35 35 35 35 Reserves & surplus 818 1,268 1,622 2,141 2,690 Borrowings 312 113 113 113 113 Deferred Tax Liabilities (Net) 12 14 14 14 14 Sources of funds 1,175 1,430 1,783 2,302 2,852 Net Fixed Assets 839 925 1,144 1,221 1,292 Investments 2 21 21 21 21 Inventories 220 357 433 574 609 Sundry debtors 192 262 335 444 472 Cash & Bank Balances 13 26 3 244 673 Loans and advances 118 213 260 345 366 Total current assets 543 858 1,031 1,607 2,120 Sundry creditors and others 198 373 412 546 579 Provisions 11 17 17 17 17 Total current liabilities & provisions 209 390 429 563 597 Net current assets 334 468 602 1,044 1,523 Uses of funds 1,175 1,414 1,767 2,286 2,836 Book value per share (Rs.) 49 75 95 125 156
Free cash flow Year to March FY15 FY16 FY17E FY18E FY19E Net profit 148 155 375 541 571 Add : Depreciation 47 51 61 73 81 Others (22) (79) 2 2 2 Gross cash flow 174 127 438 615 654 Less: Changes in WC (86) (121) (157) (201) (50) Operating cash flow 88 6 280 414 604 Less: Capex 125 130 280 150 151 Free cash flow (37) (124) 0 264 453
CasH Flow Statement Year to March FY15 FY16 FY17E FY18E FY19E Cash flow from operations 88 102 280 414 604 Cash Flow from investing activities (115) (175) (269) (139) (140) Cash Flow from financing activities 29 86 (34) (34) (34) Capex (125) (130) (280) (150) (151) Dividends (17) (17) (22) (22) (22)
27 Edel Invest Research
Natco Pharma Ltd.
Profitability & Efficiency Ratios Year to March FY15 FY16 FY17E FY18E FY19E ROAE (%) 20.7% 14.4% 25.3% 28.2% 23.3% ROACE (%) 18.2% 17.8% 32.3% 36.3% 30.4% ROIC (%) 18.2% 17.7% 32.0% 36.1% 30.2% Inventory day 87 92 86 86 86 Debtors days 68 73 67 67 67 Payable days 79 91 82 82 82 Cash conversion cycle (days) 75 73 71 71 71 Current ratio 2.6 2.2 2.4 2.9 3.6 Debt/Equity 0.4 0.1 0.1 0.1 0.0
Turnover Ratios Year to March FY15E FY16 FY17E FY18E FY19E Total asset turnover 0.7 0.7 0.9 1.0 0.8 Fixed asset turnover 1.0 1.3 1.8 2.1 2.1 Equity turnover 1.1 1.1 1.2 1.3 1.1
Du Pont Analysis Year to March FY15 FY16 FY17E FY18E FY19E NP margin (%) 19.5% 13.6% 20.4% 22.2% 22.1% Total assets turnover 0.7 0.7 0.9 1.0 0.8 Leverage multiplier 1.6 1.5 1.4 1.3 1.3 ROAE (%) 20.7% 14.4% 25.3% 28.2% 23.3%
Valuation Parameters Year to March FY15 FY16 FY17E FY18E FY19E Diluted EPS (Rs.) 9.4 8.9 21.5 31.0 32.8 Y‐o‐Y growth (%) 32.6% -5.2% 141.6% 44.2% 5.7% Diluted PE (x) 92.4 88.5 36.6 25.4 24.0 Price/BV (x) 16.2 10.6 8.3 6.3 5.0 EV/Sales (x) 16.4 11.6 7.3 5.4 4.9 EV/EBITDA (x) 61.7 51.2 24.5 17.0 15.5 Dividend yield (%) 0.1% 0.2% 0.2% 0.2% 0.2%
28 Edel Invest Research
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Vinay Khattar Head Research
Rating Expected to
Buy appreciate more than 15% over a 12-month period
Hold appreciate between 5-15% over a 12-month period
Reduce Return below 5% over a 12-month period
Natco Pharma 5 years price chart
900
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29 Edel Invest Research
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30 Edel Invest Research