gRevlimid momentum to persist; Preparing for next round of blockbusters…
About the stock: Natco has, over the years, developed a knack for manufacturing complex generic products with few competitors, especially for the US market.
• India formulations mainly comprise oncology products (39 brands). For the US, it follows partnership products for risky launches and acquired Dash Pharma for a front-end presence. It owns six FDF, two API manufacturing facilities and two crop health sciences units.
• Maiden entry into crop protection was via launch of pheromone product, Natmate. Also launched CTPR pesticides subsequently.
• Q3FY25 revenue break-up – domestic formulations: 21%, export formulations: 62% (mainly from the US, Canada, Brazil), APIs: 14%, crop protection: 3%
Investment Rationale:
• Q3FY25: No Revlimid show but ensuing quarters promising – Revenues degrew ~39% YoY to ₹ 464 crore crippled by export formulations which de grew 53% to ₹ 286 crore probably on account of absence of anti-cancer drug gRevlimid. Other segments also witnessed mixed performance with 44% growth in APIs to ₹ 66.6 crore, 7% growth in the crop protection to ₹ 15 core and 3% de-growth in the domestic formulations to ₹ 96 core. EBITDA de grew 90% YoY to ₹ 27.6 crore while EBITDA margins squeezed 2996 bps to 6%. The decline in EBITDA was primarily due to inability to capitalize on operating leverage. PAT de grew 38% YoY to ₹ 132.4 crore.
• Company bets on 6-7 niche products to bridge gRevlimid gap –The company is now banking on some new FTF opportunities, notably gOzempic (Anti-diabetic), gWeovy (Weight management) and gLynparza (Anti-cancer) among others. (Total pipeline- Key Solo Para IV FTFs- 8; Key Para IV products -7). The management is confident on the prospects of some of these products to maintain the blockbuster traction beyond FY26. Already, its partner Mylan has settled a US patent litigation with NovoNordisk for generic Ozempic (to be outsourced from Stelis) which registered ~US$ 9 billion sales in the US in CY23. The Kothur warning letter is not expected to have much impact as the company has dome dual filing including from Vizag for most of the important products and tie-ups with the CDMO players. We continue to have faith in Natco’s ability to focus on blockbusters which are capable of generating robust cash flows for 3-5 years horizon before they fade. The company is spending good amount of money on the R&D (8-10% on normalised sales).
Rating and Target price
• Our target price is ₹ 1305 based on 38x FY27E base business EPS of ₹ 32.5 plus ₹ 66 NPV for gRevlimid. We believe the correction is overdone.
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