Natco Pharma: Risk-reward remains favourable 􀂄 JM Financial

Risk-reward remains favourable
􀂄 Strong operating performance in FY12: Natco posted 15% sales growth for
FY12 at `5.2bn. During FY11, the company had divested one retail pharmacy
store in US (sales of $10mn). Excl the US retail sales, underlying sales were
stronger at 27%. EBITDA at `763mn was up 25% YoY while margins at 14.7%
were higher 120bps YoY. The margin increase was driven by better product
mix (lower US retail). Adjusted net profit at `596mn was up 2.8% YoY
primarily due to higher taxes (at 26.1%). Domestic oncology sales at `1.5bn
grew by 22% YoY driven by both volume and price increase.

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􀂄 Base business earnings to be steady: We expect base business earnings to
witness 9% CAGR for FY12-14 with FY13/14 EPS at `20/`22.9. We expect
FY13/14 sales growth to be 11%/13% with EBITDA margins at c.20%.
􀂄 US opportunities to unfold in FY13; Copaxone remains the key value
driver: We estimate NPV value/share of `275 for the 4 US opportunities. The
earliest of the US launches will likely be Lansoprazole (Rx/OTC; `11/share)
expected in FY13. Lanthanum launch is likely in FY14 (`13/share). The district
court decision in the Copaxone litigation is expected near-term. Our NPV
value of `160/share assumes 75% probability of launch reflecting the
regulatory approval risk. We see a tentative approval for Natco’s filing as a
key trigger which will raise the probability to 100% (independent of the
litigation outcome; full value of `213/share). Our estimates for Copaxone are
conservative and assume a 4-5 player market – earlier launch can provide
upside to JMFe. Lenalidomide (at 75% probability) accounts for an NPV value
of `91/share – although timelines are stretched.
􀂄 Maintain BUY; raise Mar’13 TP to `458 (from `375): We raise our FY13E EPS
by 13% to `20.0. We introduce FY14 EPS of `22.9. Our Mar’13 TP of `458 is
based on 8x FY14 base EPS and `275 for the US opportunities. Given
litigation/regulatory actions expected in the near term, we see the risk-reward
as favourable for the stock. Maintain BUY. Risks to our call are delay in
approvals and negative outcome in litigation.