Lack of new launches in near term a worry for Natco Pharma stock

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Prior to January 2018, shareholders of Natco Pharma had little reason to complain. The stock had risen 40 times over the past decade. 

However, since the last year, it has corrected 26 per cent as outlook for earnings growth remains subdued. Natco has, over the past few years, successfully penetrated the US market with niche product launches via tie-ups with established players in the generic space. 

Of the recent ones that drew investor attention was a generic version of the multi-billion dollar drug (Copaxone), used to treat multiple sclerosis — launched in collaboration with Mylan in FY18. Its limited competition flu treatment drug (generic version of Tamiflu) also generated good sales during the flu season last year.  

However, the high base created by Tamiflu and a significant price erosion in the Copaxone generic — after partner Mylan cut prices for the second time — kept the December 2018 quarter earnings muted, say analysts. 

The declining margins (operating margins down 1,353 basis points year-on-year), along with an above 25 per cent fall in profits in the quarter gone by, has impacted investor sentiment. 

Analysts at Anand Rathi say that after Copaxone, Natco’s next big launch could be anti-cancer drug Revlimid generic (scheduled for March 2022). Others like immunosuppressant Afinitor generic and oncology drug Nexavar (Sorafenib) could also be explored after FY21. 

Lack of significant launch visibility has led analysts to estimate net profit numbers to be little changed next year. 

Analysts at Jefferies expect flat FY20 earnings versus FY19, led by lower Copaxone gains, and foresee a cut in earnings from 9-20 per cent over the next couple of years. Nevertheless, the company has a strong pipeline and has had a history of surprising the Street with new launches, say analysts. 

The Jefferies analysts add that despite near-term earnings looking weak, Natco has strong drivers after FY20, led by its US pipeline, and the ramp-up in India as well as rest of the world. They expect 25 per cent growth after FY20. Domestic growth for the firm is looked at with confidence given the Hepatitis-C segment sales are stabilising and the oncology segment is doing well. 

The company is looking at other geographies (Brazil, Canada, China) and other businesses (agrochem) to drive growth. Target prices by Anand Rathi, ICICI Securities, and Jefferies, nevertheless, indicate 10-47.5 per cent upside from the current levels for the stock.

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