Event update: Natco Pharma (Outperformer) - Strategic innovation continues

Event

Over the last few days, Natco has made a couple of announcements which are interesting from a strategic perspective even though the near term financial impact may be limited

Key highlights

• Launch of generic Valsartan / Sacubitril tablets - generic version of Novartis’ relatively new cardiac drug Ernesto – in India
• Management has indicated that currently Novartis sells the drug on its own as well as through a couple of partners; current sales are >Rs1bn. There are a couple of patents protecting Ernesto in India but the Natco mgt feels that it can prevail, if litigated.
• The company believes that if the market doesn’t get crowded with follow-on generic launches over the next few months, this could well be Natco’s first big launch in the CnD (Cardio and Diabetes space).
• Secondly, recently Natco has announced an interesting diversification looking   to enter agrochemical segment. For this it has outlined a capex outlay of Rs1bn looking to set up a greenfield facility for both agrochemical technical as well as formulation. The facility is expected to be ready by 2019-end.
• Mgt perspective is that a general lack of R&D focus amongst current participants in the agrochem market provides an opportunity for potential disruptors like Natco who can leverage their R&D and regulatory capabilities to create some attractive opportunities by leveraging gaps in the patent landscape etc.
• Mgt believes that if it plays out as expected, agrochemical could be meaningful opportunity for the company in next 3-4 years

Valuations & view

Given their unconventional nature, we believe that the outcome / degree of success of Natco’s these two initiatives is hard to predict. However, given the increasing competitiveness of the typical generics business model, we believe that such “out of box” strategic thinking – strategic innovation will be increasingly key to success for Indian pharma players. In our view, Natco’s business strategy is broadly in-line with this thought process which differentiates it from most Indian peers. Overall, with proven R&D capabilities post successful launches of multiple complex generics and a much stronger balance sheet, Natco has now created a strong platform to make relatively aggressive investments (versus the past) to move into the next growth orbit. While earnings may be flattish over FY19-21E, anticipated launches of gRevlimid and gNexavar etc., accompanied with the scale-up in India and RoW markets will keep up the earnings momentum over the next 3-5 years. Maintain Outperformer.