Natco Pharma’s (NTCP) 2QFY18 revenues grew 2% to Rs 4.3bn, largely in line with EE, while EBITDA/earnings at Rs 1.22bn/Rs 844mn (+16%/25% yoy) beat estimates. The outperformance was led by lower opex and higher-than-expected gross margins. Business outlook for the near-to-mid term remains strong with (a) the launch of high-value gCopaxone and (b) increasing domestic market focus which can lead to sustainable earnings. Owing to the earlier-than-expected launch of gCopaxone 40mg, we raise our FY18E earnings by 55%, while keeping FY19E earnings intact. We reiterate ADD with a Dec’18 TP of Rs 1,010, derived by assigning 21x to Dec’18 earnings and valuing gCopaxone at Rs 150/share.
US biz outlook strengthens with pre-launch of gCopaxone: During the quarter, NTCP booked shared profits of Rs 600mn, mainly from the high-value gDoxil. Overall contribution from the US is set to strengthen going forward with the launch of gCopaxone 20mg and 40mg. While the 40mg variant has been launched at risk, the company remains confident on the litigation front and has mentioned the risk is partly mitigated through its contract with partner Mylan. We expect gCopaxone to contribute US$ 77mn to NTCP’s topline in FY18E, with margins likely above 85%.
Focus shifting to domestic market; 20% growth targeted: NTCP has sharpened its focus on the Indian market amid challenging conditions and steep price erosions in the US market. The company has launched three products in the domestic market, largely first-time introductions. NTCP mentioned its Hep-c portfolio is slowing down due to steep price declines, which are not being compensated by higher volumes. The company remains confident on its domestic operations and expects it to meaningful contribute next year.
R&D to be concentrated on complex generics: NTCP restated its R&D plans and highlighted that the focus would be on complex generics in the US market, especially peptides and injectables, which usually require higher investment versus me-too generics. The company will continue with its partnership development model in the US, but looks to raise investments – this in turn would lead to an equal profit share.
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gCopaxone litigation outlook: NTCP has already won a US District Court ruling for four patents, which were later appealed at the Federal Circuit; it is now awaiting judgment on the same. Teva was issued a fresh patent in 2016 (process patent), on which litigation is ongoing at the District Court; however, NTCP remains confident on a favorable ruling.