Natco reminds me of this quote:
Founded by VC Nannapaneni in 1981, with its HQ in Hyderabad, Natco Pharma is a leading player in APIs, intermediaries, and finished dosages.
They have 9 manufacturing units across India, catering to the following business segments:
- International formulations (53% YoY growth)
- Domestic formulations (4.2% YoY growth)
- APIs (down 36% YoY)
- Crop health (new business vertical: 165% YoY growth on a low base)
Leveraging the Hatch-Waxman Act
Natco’s entire business model was built on this particular act.
Here is how it works – Basically, the act was introduced to balance both innovation (the drug discovery companies) and affordability (the generic players). By default the innovator will get 20 years of patent/exclusivity. As the drugs near the exclusivity completion, they file for patent extension. During this time, the act allows generic players to file for ANDA and challenge the patents. If the generic player wins the patent, it gets 180 days of exclusivity to sell their drugs. The generic player can still sell at a higher price (but slightly less than the innovator) for 6 months.
The company focuses on securing 180-day exclusivity as the first filer for niche, high-value, and complex molecules. This approach allows Natco to be the first to launch generic versions of key drugs, capturing significant market share early on. However, this strategy has its own negatives – it leads to lumpiness in earnings, as it heavily depends on innovation and a constantly growing pipeline. There are no stable base earnings for this business, making it essential to keep pushing boundaries and staying ahead in the competitive landscape.
Revlimid: Growth secured until FY26, but no visibility for FY27
Natco, in collaboration with Teva, launched generic Revlimid in the U.S. (annual sales of approx $2.9 billion) in March 2022, which has significantly boosted earnings since then. However, exclusivity is set to end in January 2026. Rough estimates suggest that export formulations could decline from around 4500 Cr in FY25E to approx 2500 crore (in the best-case scenario). A huge fall by any metric.
Here’s what the management had to say in the Q3FY25 conference call:
*Source: Natco’s Q3FY25 Con Call
Been there, done that for Natco
This is nothing new for Natco. Every 3–4 years, they experience strong growth followed by a 2-year decline in revenues. That’s the nature of the business. For example, in FY2017, there was a huge jump in revenues due to the launch of Tamiflu ($500 million opportunity). We saw a drop in revenues in March 2020 as the exclusivity came to an end. The same will be the case with Revlimid.
Semaglutide: Next big opportunity, but it will take time.
Natco has first-to-file rights for semaglutide, which is a $15 billion market opportunity. They are partnering with Mylan, but the US launch is still quite far off, likely in 2030. On the downside, we might see their consolidated profit drop by 40–50% in FY27. For India, the launch is expected only after 2026, which could help boost revenues a bit, but nothing major in the short term. Everything really depends on how the approvals and partnerships play out.
*Source: Q2FY25 Investors Presentation
Acquisition on the Cards? Building Growth Optionalities
The company is sitting on a strong cash pile of 2400 Cr right now, and with the Revlimid exclusivity ending by Jan 2026, they are expecting it to grow to 3500 Cr. The management has hinted at a potential acquisition in the next 1–2 years, which could help offset any revenue dip post-Revlimid. They are also building optionalities like eGenesis and NRC 2694, showing they are focused on long-term growth and staying innovative. It’s clear they are planning ahead to keep things steady and competitive.
Reasonable valuations, but do they matter?
Natco is currently trading at 9 times EV/EBITDA on a TTM basis. If profits drop as expected, from the current 1,944 Cr (TTM) to around 800–1,000 Cr in FY27, the PE would be around 25 times FY27E. While this valuation looks reasonable on depressed earnings, it doesn’t yet factor in any potential positive triggers, such as the domestic revenues from semaglutide or strategic acquisitions. Overall, the current valuation may look decent, but unless management answers what’s next? the valuations are of little use.
The company has faced significant PE derating in the past, particularly in 2018 and 2021, leading to stock price drops of up to 50%. Historical cycles show that earnings disruptions have a direct impact on valuations, which could be a risk going forward. Domestic revenues from semaglutide are at least two years away and remain critical for mitigating such risks. Without clear catalysts, the stock could see further volatility if earnings take a bigger hit than expected.
Natco remains a decent long-term bet, backed by a strong core portfolio and capable management. However, near-term growth challenges are evident, and the Revlimid-driven growth story appears to be fully priced in. With semaglutide revenues still a couple of years away, the market is likely to stay in a wait-and-watch mode. For long-term investors, this offers an opportunity to build positions gradually over the next 2–3 years in absolutely no hurry.
Caveat: Natco reminds me of Tejas Networks current scenario. Everyone knows FY25 will be a bumper quarter, but after that, there is no visibility. The market is not bringing the stock down because the product and technology are world-class, and multiple triggers are visible (yet to be finalised). However, the stock may not rise until there are some new deal wins and earnings visibility.
Tatparya ye hai ki:
- Revlimid will take care of growth till FY26
- Nothing much to say (growth void?) from FY26 to FY30
- Semaglutide + a few more will come into play from FY31 onwards
Disclosure: I, Krishna Appala, Research Analyst, author, and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific view(s) in this report.
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