Natco Pharma - R&D @ core; visit note; ; Edelweiss, PDF link

Natco Pharma (NTCPH IN, INR 340, Not Rated)

We met Mr. Rajeev Nanapaneni of Natco Pharma. With its superb R&D capabilities, we see Natco way ahead of peers in the midcap space. Though adverse ruling in Copaxone will limit the upside, management considers it an attractive opportunity. At 17.6x FY12 EPS of INR19 Natco’s base business is fairly valued. Successful monetization of FTF assets will create long-term value for shareholders, in our view.

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Sustained momentum in base business

Natco’s base business earnings have posted 10% CAGR over FY09-12, driven by strong momentum in domestic business (38% of sales). Within the domestic, Natco has built a strong presence in oncology. The company expects its PAT to grow 50% over FY12-14E to INR900mn (EPS of INR29 in FY14), driven by Lansoprasole launch in the US.

Copaxone remains an attractive opportunity despite adverse ruling

Adverse ruling in Copaxone (USD3bn revenues) will limit the upside for Natco from g Copaxone launch, even as management considers it an attractive opportunity. Natco believes that even if it gets 6-12 months window prior to Sep’15, it can still make USD30-50mn profit from this opportunity. Moreover, post Sep’15, g Copaxone can contribute USD15-20mn recurring profit (EPS of INR2.4) for the company. 

Formidable portfolio through strong R&D

Natco has built a formidable portfolio of ANDA filings in the US (23 filed), driven by strong analytical and characterizations capabilities. The portfolio includes two most complex blockbuster drugs Revlimid and Copaxone. We expect significant value creation over the 3-5 years as the FTFs/niche products begin to get commercialized.

Outlook and valuations: Monetization of US pipeline key

While, at 17.6x FY12 EPS of INR19, Natco’s base business is fairly valued, successful monetization of FTF assets in the US will create long-term value for shareholders, in our view. Led by Lansoprazole launch in FY13, we will witness at least one limited competition product launch in the US over the next couple of years.

Natco Pharma - R&D @ core; visit note; Not Rated

Regards,