Natco Pharma: Focusing On Complex Products

(Sandeep Patel) #208

One of the best margin numbers in the sector (Divis is closest, however Natco leads). The question is, is it sustainable in the long term? High base in quarters to come.

Possible triggers

  • Ramp up in gCopaxone
  • Revenue growth from gTracleer and gGleevec
  • Couple FTF’s in FY19
  • Ramp-up in Brazil and Canada

Possible dampers

  • Degrowth in Tamiflu

Disc: On radar (no holding currently)

(Harshit Goel) #209

Concall Q2FY19 notes

  • Formulation Domestic Sales: Rs. 193.87 cr
    Formulation Export: Rs. 247.81 cr
    API: Rs. 66.81 cr.
    Other Income = Rs. 53 cr
    Subsidiary = Rs. 22 cr.

  • Our top 4 products in USA are Tamiflu, Copaxone, Liposomal Doxorubicin and Lanthanum Carbonate.

  • Copaxone: It is doing well. Market share increased from 15% to 20%. Our discounts are much better than Teva so price is not a challenge. New Generics not a challenge as the prices are already low. Problem is to take market share from Teva. Market share will improve further, it will show in results next year.

  • Key Triggers
    Near Term: Increased market share of Copaxone.
    Medium Term (FY20-21): Brazil, Canada and India.
    Long Term (Beyond FY21): Revlimid and other exclusivities.

  • Capex: Rs. 400-450 cr planned this year. Already spent Rs. 200-250 cr. Three main areas of Capex will be Vizag Plant, API in Hyderabad and Oncology expansion in Hyderabad. Vizag should be completed and go online in FY19, inspections will be triggered early next financial year.

  • Tamiflu: Flu this year is not as intense as last year. We will see decline in flu earnings this year. Margins in current quarter reflects some portion of of delayed profits of Tamiflu of last season.

  • Brazil: Bullish on Brazil due to two reasons - New partner and Good Product Profile. This new partner was earlier associated with Mr. Arun Kumar of STRIDES. He has made some strategic changes for Brazil. Will see positive affects in FY19. Brazil is a Branded Generics market. For Oncology it’s tender based business. We are making 2 unique launches in December 2018 and this will wipe out our losses in Brazil, some other launches in April-June 2019. In FY19-20 we will see meaningful contribution from Brazil to our balance sheet. Base case turnover is $10mn and best case is $ 20 mn, but depends on products.

  • China: We are looking to enter China. Some positive regulatory changes have taken place in China. One of them is that if you have approval in western countries (USA) then they will fast track approvals in China. It will take 12-18 months for approvals in China if already approved in USA. We have 3 filings pending in China. If you get 1 product approval in China then numbers will be as good as US launch or India Branded launch. Will do business through local partners there. We are cautiously optimistic on China.

  • Domestic: Oncology = Rs. 97 cr., Non Onco = Rs. 79 cr and Other = Rs. 17 cr.
    15-20% growth in domestic oncology will be maintained this year.
    15% market share in domestic oncology market. (educated guess by management).
    12-15 unique launches this year.
    Hep C did sales of Rs. 74 cr this qtr as compared to Rs. 69 cr in previous qtr. Volumes and Prices are stable.
    Domestic and Subsidiary sales are around Rs. 220 cr currently, going forward would like to see this number increase to Rs. 300-350 cr. in next few qtrs.

  • Buyback: Cash as on September end is Rs. 1365 cr. Doing buyback as cash position better than anticipated. Buyback does not mean that future investment opportunities not there.

  • Bullish on Oncology and MS pipeline in Brazil, Oncology pipeline in Canada, Oncology and Cardiac in India.

  • Focus on Non USA business. Spending 60-70% of R&D on Non USA business and 30% on USA. Earlier it was other way round.

  • 10-12 filings in USA in next 12 months. 2-3 FTFs approval expected.

  • Earnings guidance intact as given in earlier quarter.

  • We do only niche products. We never did any combinations, so no affect of ban on FDCs in India.


([email protected]) #210

Very valid questions, Bharat. I did some high level research and found that the company did multiple QIP in past years - which explains the dilutions. Also the dilution is not a lot while at the same time as Tarun and Sandeep highlighted, the returns have been good. I did not find any reflags here - hope I dint miss anything.

(Salman_kn99) #211

It might be one of reason. Working capital to sales is very high particular to this year (~67%) & average 35-45%. Looks very high.

(Salman_kn99) #212

Hi Bharat, From which site did you get this info of Promoter & Promoter Group?

(Vijay Dosapati) #213

The promoter share holding had gone down from 51.19% to 48.36% because the promoter Mr. Rajeev Nannapaneni had donated 1.5 lac shares to LV Prasad Eye Insitute .

The link for the same is given below:

(Bharat) #214

@iivans I agree , the growth has been phenomenal in last 2 Years. EPS jumped from 9 in March 2016 to 27 in March 2017. Profits similarly tripled in one year during same period. NPMs rose from 15% in March 2016 to 30% in March 2018. Where can these NPM margins stabilize. Have to look for reasons for this sudden growth from March 2016 to March 2017. Coming to the regular dilution , the business seems to be capital intensive as can also be said by looking at the high amount of Capex every year. Instead of choosing debt , they have chosen to dilute equity to raise regular capital. There are no red flags in doing that. I like businesses which can grow with no equity dilution or which can grow without much capital.

@vijaydosapati 1.5 Lac shares will corresponds to mere 0.3-0.4% ! The reason for promoter holding going down looks majorly because of continuous equity dilution as I can see the number of shares of promoters has hardly gone down much but as a % of holding has came down by 3%.

Disc : No holdings , studying !

(Vijay Dosapati) #215

My mistake. The promoter share holding has come down because of QIP issued in Dec’17 for 915 Cr. It was done to increase the cash reserves and utiliize as and when they get good opportunities through organic/ inorganic route. This was also mentioned during yesterday’s concall.

But issuing QIP in Dec’17 and announcing buyback after 10 months (for a smaller amount) did not make much logic tbh.

(vskr63) #216

there was a burden of a possible outgo of cash due to litigation which eased due to recent favourable judgement. Looks like the management is using the cash set aside for it to buyback shares

([email protected]) #217

Totally agree - If I was an owner of the company, equity dilution would be the last resort I would take. This is an extract from 2017-18 annual report shared by Harshitgoel [quote=“harshitgoel, post:195, topic:5238”]
In FY 2017-18, we raised around `9,150 million via a Qualified Institutional Placement (QIP). This capital will be invested in organic growth and potential niche inorganic opportunities.

(shyamutty) #218

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(Salman_kn99) #219

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(Krishnendu) #221

(manivannan.g) #222

Is Mr.Market seeing this as a risk and pricing in, despite good nos?

(saumya) #223

So qip dilution and sharebuyback back to back.
This put serious question about promoters capital allocation plan.

(Jayatu) #224

Screen shot of segmental breakdown earning of Q2 FY19. How they arriving formulation gross income to 4390.3 Mn it seems to be 2983.2 Mn as per presentation

(Prabakaran) #226

I am rather worried on the reliability of P & L statements of the company. Barring fluctuations in the quarterly report, annual data presented looks near flawless in showing consistent growth.

The major contributing factor for the consistent increase in net profit year after year and also its large leap in the last two years is due to a constant decrease of proportionate raw materials cost. Raw materials cost in % of Sales was 40% in FY 2013, but came down to 20% in FY 2018. I could not find a similar trend in other pharma companies.

I am not able to comprehend the rationale behind Natco’s capability in achieving the same. Can anyone throw more light on this?

(vskr63) #227

To the best of my knowledge Natco has been a pioneer in drug chemistry and has talent feared by its competitors, Their service towards production and commercialization of cost effective drugs panning complex ailments is well documented. RM costs reduction as % should not be worry as the economies of scale and pricing power kick in…Manpower ( talent ) cost is important…and it is rising…

Disc, invested since 2008 small exposure of 360 shares…

([email protected]) #228

The USP of this company is to recreate complex drugs which are going off patent. Usually these are diffcult to reverse engineer and involves a high R&D spend and risk of litigation. Thus they only go after big drugs like Copaxone which has a huge market in US. Once they get the right to sell these drugs, they find a partner to sell the drug in the respective country. This ensure that the legal risk is managed by the partner. In case of Copaxone, Teva is the patent holder and Mylan is Natco´s partner to market it in US. This company also has other business models but the biggest value is added this actvity.
All of this means that they make high margins over a short period until other competitors reproduce the durgs and bring down the price of the drug. All of this info is available in their AR report. Also I have a friend in US who is into pharma product brand analysis and confirmed this thesis. The biggest risk to this company is to be able to continue replicating this business model. I see that they are trying to establish themselves in branded generics in growing markets like India and Brazil to spread their risk. Thus i would not expect the current margin and profit growth to continue forever.

(draveshia) #229

Why is there market share in copaxone not increasing inspire of price reduction, cutting margins. Can throw some light on there terms with mylan