is one of those companies which has delivered multi-bagger returns in the past 20 years, creating huge wealth for the shareholders. The stock has turned out to be a 208x-bagger since 2000 and 18x-bagger since 2008. The compounded returns form this stock have been 32% since 2000 and 34% since 2008. Note that these returns are not including the dividend payout; which the company has maintained for several years.
The Hyderabad based small company has been the beneficiary of its high-risk strategy of going after the litigation-prone molecules, which can provide windfall gains. The mid-cap company, due to its risky strategy, collaborated with large pharma companies to share the risk and potential gains. The strategy has played out well for the company.
The company in the past two years has launched generics of Tamiflu and Copaxone. These limited competition drugs have provided windfall gains for the company in the past two years. Copaxone, which was launched in Q3FY18, has been its largest generic so far (~$4bn sales of innovator’s drug). In the past two years, Natco’s combined profit of Rs1,182cr was more than the combined profit reported by the company in all the previous years. Despite the record profitability, shares have been stagnant in FY18.
gCopaxone, the multiple sclerosis drug is having only three companies in the market and there is a possibility of entry of another competitor in H2FY20E. gCopaxone is expected drive Natco’s profitability in FY20E as well, however, there is some uncertainty in the investor’s mind about the growth of the company beyond FY20E. Natco’s pipeline has some interesting ANDAs for drugs such as Gilenya, Sovaldi, Nexavar, Tracleer, Lenalidomide, etc.
Revlimid (Lenalidomide) is a large-sized opportunity and Natco will launch a generic version of Revlimid in March 2022. This is a drug sold by Celgene Corp. and both companies have settled due to the litigation. This drug currently has sales of ~$6.2bn in the US and we believe that Revlimid will become ~$10bn drug for Celgene Crop in the year 2022 when Natco will be able to launch its generic copy. It’s a very big opportunity for Natco Pharma and the company expects to receive approval for this drug sometime next year.
Investors are concerned about the company’s change of strategy in which management indicated that the company will focus on India/Brazil/Canada markets and will reduce R&D spend on US markets. It believes that the US generics sector has become competitive. Recently, some pharma companies have indicated improving scenario in US generics, but Natco continues to maintain its bearish stance on the US.
The company is also not present in upcoming opportunities in the global biosimilar market, which is also a worry for investors. The biosimilar market will be worth tens of billions of dollars in the next 10 years and will provide a large opportunity for pharma companies. The development of biosimilars require significant upfront investments but Natco is yet to announce any development on that front.
The company in FY17 and FY18 cumulatively paid out Rs268.5cr in dividends. However, it also raised Rs915cr though QIP in FY18 and has recently announced a buyback amounting Rs250cr. This seems somewhat odd as it paid out dividends then raised equity and then announced a buyback. The company has also maintained a secrecy around gCopaxone, which makes it difficult to gauge certainty of the gCopaxone profit going ahead. This is exactly why the shares did not react as per our expectations when the market share of Mylan, Natco’s partner in gCopaxone, rose.
Natco, at the CMP of Rs714, trades at PE of 19x of its FY20E EPS. At the CMP, the stock is trading ex-Revlimid opportunity. The approval for this drug can potentially provide lumpy returns. While the concerns are on the growth part, the Rs915cr QIP was particularly to invest in organic growth and potential niche inorganic opportunities and we expect the company to provide investors with some development on that front.
While the growth concerns are for real, generic pharma companies are known to keep secrecy around their R&D investments. We believe that once the company announces product fillings or approval for large-sized drugs, Natco’s shares will come back in focus, but returns will be lumpy. Those who can hold the breath until then can buy Natco Pharma.