Natco Pharmaceuticals Ltd - Initiating Coverage - Edelweiss

Natco Pharmaceuticals Ltd. (NPL) is a R&D focused organization with strong focus on oncology. The company is a market leader in the domestic generic oncology market, commanding a market share of 30%. Although its domestic business remains a cash cow for the company, its major growth driver is its US business where it has some very interesting niche filings which could help the company deliver extraordinary growth and cash flows over the next several years. Copaxone, one of the products from its basket of niche products has already cleared regulatory hurdles and is currently awaiting USFDA approval . It is expected to be launched as early as May 2014. We believe the pipeline for the company is strong enough to get incremental and sustainable growth going forward. We believe that management's strong focus on R&D and emphasis on difficult to manufacture products would continue to support growth going forward.

Investment Rational

Building a strong US business franchisee

Over the years, through concentrated efforts, NPL has built a focused list of product pipeline for the US market. The company has a portfolio of around 31 ANDAs filed with the USFDA. NPL has 21 filings yet to be approved by the USFDA, where most of these products are difficult to manufacture and would have limited competition for an extended period of time. The company has some good filings in the form of Copaxone (USD 3 bn US sales), Revlimid (USD 2.5 bn US sales & growing), Tamiflu (USD 485 mn US sales), Tykerb (USD 125 mn US sales), Nuvigil (USD 400 mn US sales), Fosnerol (USD 115 mn US sales), Lansoprazole OTC (USD 300 mn US market), Vidaza (USD 380 mn US market). All these products would be "limited competition products" and would thus add favorably to the growth of the base US business.

Focus on consolidating leadership position in oncology

NPL is a leader in the oncology space, with 30% market share in the domestic generic segment. The company's oncology portfolio has a total of ~20 products, and has grown at a CAGR of 22.9% over FY06-13. Currently, India has 28 lakh recorded cases of all types of cancer even as at least 8 lakh new cases are being witnessed annually. We expect the oncology segment of NPL to grow at a CAGR of 13.0% over FY13-16E.

API to show steady growth....Pharmacy to remain flat

Over the last four years, NPL has grown its revenues from exports of API's at a CAGR of 29%. The company has currently 34 products filed in the US (overall 1089 filings globally) and around 15 products under development. We have conservatively built in only a 5% growth in the API segment as more products get consumed for internal use. Further, the company has some revenues coming in from the pharmacy business in the US. But, it has been gradually reducing focus on this business and has already sold two of the three pharmacies it had a stake in. NPL would continue to hold the remaining pharmacies but we don't expect the same to contribute much growth going forward.

Valuations

The NPL stock is currently trading at valuations of 21.8x its FY16E core earnings. We value NPL at 14x one-year forward FY16E earnings of INR 39.2/share on account of expected steady cash flows, impending improvement in margins and steady growth in the domestic market. We further value its Para IV pipeline at INR 478/share. We initiate coverage on the stock with a "BUY" rating and a target price of INR 1028/share.

Source : Equity Bulls

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