Natco Pharma: Focusing On Complex Products


(Tarun) #125

Some Notes from Q1’FY18 Con call and Investor presentation:

Hepatitis C Franchise: Worldwide, Hepatitis C market was estimated to be ~$11.81bn in 2015, which is expected to grow at a CAGR of 15% to reach ~$27.63bn by 2021. Registrations filed in 40 countries and import permits and approvals received in 10. Key focus area is Philippine region. Domestic market has expended rapidly and they are number 1 with recent launches like Velpanet, Epclusa etc. however the segment is now short of stagnating on pricing front though volume growth is there. Evident from segment revenue:

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RoW Subsidiary: Will primarily be about Hep-C and existing portfolio of Onco. Good uptick in short duration of time:
Canada - Filed 15 products with 11 approvals
Singapore - Filed 10 products with 5 approvals
Brazil - Filed 10 products with 5 approvals


Revlimed: is a BIG opportunity. A follow-up query to be answered to FDA. Expecting approval in FY’18. Possibility of early launch (under certain conditions) from FY’19 subject to other competitor product arrive in the market.


API: Recent capacity expansion to significantly improve API capacity. Even otherwise API export is growing at a faster pace from 212 MN USD on Q1’17 to ~800 MN USD by Q1’18.

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Copaxone: Natco feels that Mylan will most likely will go for at risk launch since legal position is very strong. Though one PTAB hearing is still pending but company is positive about outcome.
brand sales for the 20 mg/mL dose of approximately USD 700 million and for the 40 mg/mL dose of approximately USD 3.64 billion for the 12 months ending July 31, 2017. Natco will receive 30 percent profit share from Mylan for the 20 mg product and 50 percent share for the 40 mg product.
Edelweiss projections: We were expecting launch (of 20 mg product) in Q4 FY18 (Jan-Mar) with USD11 million of revenue (for Natco) in FY18. Given the earlier-than-expected launch, this could now contribute USD 25 million-USD 30 million in FY18 and around USD55 million in FY19,” Edelweiss said in a note. “For the 40 mg product, the launch is likely to be in the second half of fiscal year 2018-19 due to certain patent issues. This product could contribute USD 125 million to Natco’s

FDA Approval status:
Export formulation facility Kother: Approval received in Jan’17.
Export formulation facility Vizag: Under development
API facility Mekaguda: US FDA approval Jan’15
API Chennai – US FDA Feb’16


New verticals: New C&D vertical will focus on niche products. First of kind types. So far 3 launches with more in the pipeline. Overall 10 Products targeted to be launched in FY18E (this number covers both domestic and Export formulation).


Fund raising: Fund raising of ~1,500 Cr. By cometary, they are very very clear not to pursue any me-too generic opportunity with the changing time. Rather would prefer to invest for complex generic where gestation period is long however the windfall more than well offset for the effort worth. Those opportunities may be in the area of Novel Drug Delivery Systems (NDDS) or complex chemistries. Will NOT go for Bio-similar/biological etc. Subtle expectation setting for beyond 2024-25 for complex generics.

Are there some surprises in store with the fund raising? Existing balance sheet is getting better riding on Hep-C, Copaxon etc profit flow. The cash flow is expected to improve further with Copaxone effect trickling in for full year in FY’19. On the other hand, Rajeev specifically commented that CapEx projection is for ~350Cr. only for FY19. Putting these two together, I am speculating that the fund to be used for some big ticket acquisition. Nirmal Bang security speculating about possibility of acquisition in the complex Onco space.

Any Natco experts got any insights/view specifically on the proposed fund raising of ~1500 Cr and implication of the same.

Thanks,
Tarun

Disc: Invested


(Tarun) #126

Though amount is not really big however hoping that management don’t get drawn into trivial things.


(Rajesh) #127

Also mystery behind 1500 cr capital raising is not giving comfort. We have to understand capital allocation plan.
Disclosure -Invested


(saumya) #128

Revlimid news update
http://www.ipwatchdog.com/2017/11/21/celgenes-new-revlimid-lawsuits-shows-shifting-tactics/id=90357/
can any expert in pharma patents analyze its effect


(Tarun) #129

Some speed breaker on thriving domestic Hep-C franchise for Natco.

Sofosuvir+velpanet prices set at ~15500 AGAIST current 18,500. More than 15% haircut

Hep-C, Cancer and Hemophilia drugs to cost less as regulator caps prices of 51 formulations
The new price caps are likely to hit many Indian drug makers’ domestic formulation businesses

Also, I suspect some oncology products also in purview. Anyone got a Chace to see the most recent notification? We can assess the impact by comparing notified price vs. current MRP (can find current MRP from NPPA site:)

http://nppaindia.nic.in/nppaprice/pharmasahidaamweb.aspx,


(Sumeet Shah) #130

I will try to search for the notification and see the oncology drugs involved.
In the meanwhile, I had one query. The MRP printed, is, of course, for the final buyer. Companies sell to distributors for much lesser rate and distributor to Pharma store for some rate and then the Pharma chap sells the final version at MRP, which offers him quite a margin.
Since he government has capped, say Sofosbuvir in combination with the other one, at 15,500, is it only the company who will bear the loss or it could be divided into all the channels in which case, loss to company will be minimal.


(Nasar) #131

(Ayush Mittal) #132

Found couple of good articles in reference to potential from Copaxone:

Few extracts from above:
Mylan raised the lower end of its 2017 forecasts after the surprise approval of Copaxone in October. It is the leading MS therapy worldwide, generating more than $4 billion in revenue for Teva last year.
Mylan said it was pleased with how much market share it has picked up with its version of the 40-milligram dose of the drug - by far the most commonly prescribed dosage. For the week ended Oct 27, Mylan said it took a 16.2 percent share of new prescriptions and around 8 percent of total prescriptions.


(Tarun) #133

Some competition building up on gTamiflu however don’t think this will be significant at least for this year since Natco generally do stocking in Q3 itself. Also read somewhere that this year flu is severe as compared to last year.

Lupin receives FDA approval for generic Tamiflu capsules
Lupin has received final USFDA approval for Oseltamivir Phosphate Capsules USP, 30 mg (base), 45 mg (base), and 75 mg (base) to market a generic version of Hoffman-La Roche, Inc.s Tamiflu Capsules, 30 mg, 45 mg, and 75 mg.


(Sumeet Shah) #134

Yes, agree with you that at least this year, may not be much of a problem. The flu season in the US has been relatively earlier than it comes normally, and has been severe. The generics include Natco and Cadila and now Lupin.
Recently, read an article on Fierce Pharma (last week), which stated that Mylan has gained momentum in gCopaxone with a more than expected capture of market share. I don’t know exact numbers though, but in late October 2017, Mylan has already had 8 percent of the new patients of Multiple Sclerosis and 16 percent of follow ups. So by December, I am sure the numbers will be higher than above.
gDoxil, gLanthanum and others will also yield good numbers. Last quarter result did not reflect gDoxil numbers even though it was launched earlier and sales had happened.

And now that the litigation issue on Copaxone is behind us, looking forward to a good result from Natco, as compared to other Pharma peers, who have still not fully come out of various issues plaguing the sector.


(Tarun) #135

They have increased to 10% market share by December. Also, commentary from Mylan side is very bullish.


(Venkatesh) #136

PAT up 11% YoY in 3QFY18 to Rs2175mn. Company is hosting a conference call tomorrow morning at 9.30 am. Here is the link http://www.bseindia.com/xml-data/corpfiling/AttachHis/bc8c5703-dc26-4e40-963b-16a565c2e143.pdf


(stockcollector) #137

I listened to the conf call: my rough notes are below (please double check the accuracy)

Rajeev N was not in a good mood today hearing him talk and answering questions. He cut off 2-3 analysts when they continued to ask too many questions - normally very polite, considerate and patient! Ayush also got a blunt reply from him when asked about the rationale for raising fresh equity on one hand and then this dividend which has been announced. He said 15-20% of earning will be distributed as dividends and that is the way it is for the company… Any way…

Total revenues 573 cr (685)
Net profit 217 (195)

Guidance for this year 2018 is = 2100 cr revenues and 700 cr net profit. So third quarter we can expect 300 cr profit.

Copaxone 40 mg - 15% market share, 20 mg - was not very clear (?3-5%)
Slow uptake due to complex generic, 2019 will be the best year for copaxone
2 more players expected - 1 this year and 2nd late this year or next year.
Very tight lipped about profitablity and profit sharing aspects.

Tamiflu - severe flu in January, so Q4 will show much better tamiflu sales

805 crores in the bank from capital raising - will invest in development of complex generics (US and India)

Hep C growth flattened - price erosion, top line also affected since reported after excluding GST
Hep C sale 165 cr (218 last year)
Indonesia and Philippines approval expected

Cardio - still not very significant
Dabigatran anticoagulant launched - 80 lakhs/month sales

Oncology - new launches Carfilzomib IV infusion for myeloma (very niche launch) and IV melphalan (bone marrow transplant)

Oncology growing 10%! ?affected by GST
Oncology sales in India 84 cr

Lenalidomide - FDA queries will be resolved this year

2019 launches - bosentan (will be profitable if approved earlier than others), imatinib (already very competitive market (sun was the 1st generic)

Dull years - 2020 for 2 years and then lenalidomide launch (10% of celgene sales) from March 2022 onwards (with accelerating clause if other players enter)

I remain cautiously optimistic


(Sumeet Shah) #138

@stockcollector,
Well written, thanks. You have reproduced it well.

Few points to add:
Mr. Rajeev was indeed tight lipped about any question pertaining to Copaxone sales. Don’t know why. I will try to attend Mylan concall (few weeks later) and gather what’s happening on the Copaxone front.

One very important point which caught my attention was (please correct me if need be), Mr. Rajeev was discussing how Copaxone was slowly making inroads there. He said, of the 15 to 20 generics they have there, barely 5 to 6 are generating reasonable profits. The rest are not. The present situation in the US is not going to make it any better. It is very important to note this, not only for Natco, but for the pharma sector as a whole. It’s not all that easy to get into generics and pricing pressure is only increasing, margins are shrinking. If you see Lupin’s result yesterday, and Aurobindo’s result today, both are nowhere near a good result. Even Mr. Dilip Sanghvi, few months back, after Sun Pharma’s AGM, has said that next couple of years maybe only a single digit growth or even a negative growth. In such a grim looking situation, it will be survival of the fittest. No wonder, since Q2 concall, Mr. Rajeev has been repeatedly mentioning, and he mentioned even today, that they are trying to shift focus more on Indian market, than depend on the US market. And the QIP is probably a step in that direction. Also, since I mentioned Mr. Dilip Sanghvi, I thought it apt to add here that, the largest single, non promoter investor in Natco is Mr. Dilip Sanghvi (According to December 2017 SHP on Natco’s Site, Mr. Shanghvi holds 57,50000 shares, amounting to 3.12% of the company’s shares).

A bit on Copaxone: Mr. Rajeev said, complex genercis like Copaxone take a while to penetrate the market unlike direct replacements like Tamiflu, which immediately garner a higher share. To some extent, it may be true. Momenta has a 20 mg version of Copaxone, since 2015, but does not have a good market share even today (partly because 40 mg is the more common one, 20 mg is not). So it also means, that when another player will get approval for Copaxone, they will also have to slowly climb the ladder. That will give enough time to mylan to capture at least 20 percent market share (hopefully), of Copaxone. Mylan is doing a reasonable job, trying all media measures like apps, patient support groups and systems etc, to slowly garner the market share. Also, please note, since I work in field of Oncology, I can also tell you that, usually, by far, people switch from a research molecule to a generic. It is not very common to switch from one generic to another generic.So once Mylan captures a reasonable market share of Copaxone 40, we can expect most of those patients to stick to Mylan. A new Copaxone entrant will only reduce new patients coming, but will not likely affect the already existing ones. So one more approval for Copaxone is more of a worry for Teva than for Mylan. Now there were be two, sitting on the fence, to attract and capture Teva’s patients.

My take, after the results and concall:
Natco is definitely one of the better pharma companies to invest in. However, the resistance to pharma sector is strong. Due to it’s niche products, which are coming one after the other and at the right time, Natco has been able to brave the situation till now, and probably will continue doing so. Natco has a good baseline, and on top of this baseline, every few years, somnething or the other gives a kick. The last few years growth was fuelled to some extent by Hepatitis C segment; Hepatitis C drugs have now reached a plateau phase, they may give some amount of sustained income, but may not show much of a rise. Last year, we received some kicks from Tamiflu. This year, hopefully, Copaxone will take over from Tamiflu, to give some sustained flow over next few years. Even if Mylan captures 15 to 20% of the market for Copaxone, inflows should be good and steady. As per concall, some molecules are lined up for next few years. There may be a brief lull for a year or so in 2021. And by 2022, Revlimid (Lenalidomide) will take over. So, beyond doubt, the growth story is intact, especially if you consider the doldrums which all other pharma companies are facing; this is thanks to their niche portfolio . I like their conservative attitude, and look forward to their cardiac and diabetic drug profiles. However, a word of caution. There could be resistances in the form of FDA, not getting adequate market share during rising competition in Copaxone, disruptions in domestic market due to government pricing and policies and most importantly, market view. Natco has produced consistent and superior results in last 8 quarters, but market has chosen to give much higher PE multiple to companies where we are anticipating growth after 2019 or 2020 (eg. Biocon) and has chosen not to give higher PE to companies which have produced consistent results and earnings can clearly be seen.

Disclosure: In vested in Natco; views could be biased.


(Rajesh) #139

Thanks Sumeet for detailed write up. Your writings are helping me too much to understand business. I will wait for your comment on Mylam conference call. It is good to have people like you who look everywhere to understand business.


(ruffles) #140

Market has talked a lot about copaxone and when they have got approval no one is interested in buying Natco. This quarter result shows tepid earning from international formulations however copaxone earning will show up in the FY 2019 why there is not much enthusiasm in Natco.


(Rajendra Badoni) #141

One more vital information is being overlooked by every body regarding Natco. In my thinking and study, there is no big change in business dynamics of the company as on date except that pharma is going changes in US. But so far this has not affected Natco. However there is one big change in its shareholding from 1st January 18 to 1st feb18. One of the celebrated investor Mr Sanghvi has sold his entire holding as he was an old investor and might have encased either due to LTCG or because of his other business needs. I think, looking at over all pharma space, as on date Natco still qualify as a good investment.

Disclaimer: I am invested, so views could be biased, Comments are solicited


(ruffles) #142

I want to pick one view from the recent development on Natco either sell your position or increase the position. Recently beaten price is a good opportunity to load the stock if we read and conclude from this thread. It is difficult to read from Sanghvi’s sell off instead making anything out of it could be speculative. I believe there are a lot of factors like Hep-C business, Oncology, Diabetes+cardiac and international business(Copaxone, Tamiflu Suspension). Anyone is having recent analyst report on Natco to understand future earning prospects.


(shikhar mundra) #143

how is everyone so comfortable with the earnings sustainability of natco? I understand copaxone earnings is via a para 4 route, which means the earnings from this drug will be abnormally high for a couple of years then normalise once competition comes in …which means we can expect great price erosion after a couple of years. What wil be the factor which drives growth for the company or even brings in regular cash flow. From my understanding the sustainable recurring business of the company does not even remotely justify the 15,000 cr market cap of this co. Please correct me if my understanding is wrong.
Is natco pharma a bet on the fact that the company will continuously able to break other innovators company patents and be successful in get para 4 approvals consistently?


(stockcollector) #144

Good question Shikhar Mundra! The most likely reason why the price is down, market is not certain that this growth will continue or be sustainable…

There is copaxone for next 1.5 years, then nexavar (not significant), then the rest of world/Indian market growth.

RoW and Indian market will hopefully increase significantly and they are concentrating on niche launches…They have stated that they would like their India business to double in 5 years from the current 800 crores (includes hep C, Oncology, cardio and diabetes) - I believe achievable. RoW also would significantly increase - oncology and hep c…

USA - Lenalidomide will kick in from March 2022 - this is a huge opportunity! Lenalidomide market size in USA continues to increase and in 2018 the market size is probably 10 billion (guesstimate). 10% market share in 2022 will earn Natco 1 billion. Assume 50% profit share and let us assume 30% cost for materials and other expenses - 200 million profit (1300 crores in today’s exchange rate approx) and then gradual increase every year until 2026 and then…

No debt currently. Credible management - they have been under-promising and over-delivering!

Natco not for everyone, this is a niche/complex business. I am comfortable since I know the market that they operate.

Disc- Invested since 2013, already a 10 bagger for me, increased my allocation recently by another 30%