Natco Pharma: Focusing On Complex Products

NATCO Pharma Ltd

NATCO (established in 1981) is a vertically integrated, research and development focused pharmaceutical company engaged in developing, manufacturing, and marketing complex products for niche therapeutic areas. The company growth story is due to its strong R&D focus and product pipelines. The co is projected to give returns of 94% next year

Business Model and Industry Analysis

Overview:

The company can be divided into 4 sectors namely Domestic Formulation, Export Formulation, Crop Health Science and Active Pharmaceutical Ingredients (API).

• Export Formulation (79% of revenue): Focuses on niche complex products and wins on first to file patents. The biggest market is US where currently the company is under gain sharing agreement. It has established its subsidiary in US to have direct access to market. It is also having high growth in RoW markets and pharmerging groups. Diversification in different markets help to diversify geographical risk
• Domestic Formulation (11% of revenue): Sale in domestic market has been around similar levels since past years. The company faces pricing pressure which needs to be offset with new product pipeline
• API Business (6% of revenue): Focuses on complex oncology molecules. Other therapeutic area of development includes CNS and orphan indication. Portfolio of 45 active US DMF’s with niche product under development.
• Crop Health Sciences (4% of revenue): New business launched 2 years ago. Targeting two categories of product- bioproducts and pesticides

Industry Growth:

The US pharma market is expected to grow at 5.36% CAGR. The pharmerging market is expected to grow at 8.97% CAGR where the company is trying to expand its customer base and introduce new products. The API market is expected to grow at CAGR of 7.22%. Further higher spending capacity and increasing diseases among population supports NATCO’s business.

Capacity Utilisation:

Co has 5 FDF manufacturing facility, 2 API manufacturing facility, 2 R&D centres and 2 crop health science units. The company has major concentration with exception of 2 facilities in Uttarakhand and Assam. Company has no huge capacity plans thus it can be assumed that this plants has spare capacity to support future growth

Opportunities:

• US Markets: NATCO business enjoy high entry barrier due to legal compliances, technology and R&D support and playing in niche segment. It will bank on this strength to introduce further complex niche formulas and target a minimum of 8 -10 new generic product application. Further due to acquisition, it has direct access to US market and has its own pipeline launches and in licensing opportunities
• New Geographies: Co has launched many products in Canada, Brazil and Philippines market. It is establishing subsidiary in Indonesia and Columbia. In new markets, company is strategy is “First to File” and Direct participation in tenders
• Crop Business: Co is focusing on scaling up its agri business by introducing niche molecule for both domestic and international markets

Risk:

• Co has high working capital requirement and has to hold large inventories, giving rise to liquidity risk. Further 79% of revenue comes from export giving high currency risk.
• Co has received a warning letter from US FDA for its Kothur plant. The same has not material affect on its filing as the product filings can be routed through other plants
• It also faces risk from products going out of patent and thus decline in margins. The co mitigates risk by having strong product pipeline and R&D investment (increasing YoY)

Future Expansion:

The company do not have any committed future expansion plans. It will be looking out for opportunities for inorganic acquisition which helps to either enter new geographies or new molecule segment

Management:

Management has delivered its commitment and is focused on core business operations. Further there are no much related party transactions. Promoters hold 49.7% shares which are free from any pledge

Institutional Investor:

FII and DII continue to hold around 26% in the company

Historical Data and Financials

Profit N Loss Account:

* Sales have historically grown at **18%** CAGR over last 10 years and at **48%** in last year
* Margins have continuously improved and stands at around **44%** currently

Balance Sheet:

* Company has high net cash which it is holding for inorganic growth opportunities
* Interest coverage ratio is **91 times**
* EVA of company is positive
* Inventory days have reduced from **432** days to **357** days
* Debtor days is constant
* Working Cycle and Cash conversion cycle have improved YoY
* Current ratio stands at 8 times.

Cash Flow:

* CFO/PAT is at lower side standing at 88.58% due to long working capital cycle
* It is a cash rich company and can support acquisition through internal accruals

Valuation and future potential:

Valuation:

Disclaimer: This is a study report, not for any decision making or investment advisory. Invested

Made by: Nidhi Devidan

Date:28th June 2024