Natco Pharma's Q1FY20 results (Outperformer) - Good quarter; US business traction improves

Q1FY20 result highlights

• Consol revs came at Rs4.9bn vs est Rs5bn; yoy nos are not comparable due to significant share of gTamiflu sales in the base
• Exports sales came at Rs2.1bn vs est Rs1.7bn; Q4 was Rs1.4bn – due to a higher-than-expected contribution from gCopaxone
• Domestic sales declined +13% yoy to Rs1.64bn vs est Rs2bn due to lower HepC sales (Rs310m vs Rs420m in Q4) and soft oncology sales.
• EBITDA came at Rs1.9bn vs est Rs1.5bn; Q4 was Rs1.5bn. EBITDAM at 38.9% vs est 30.4% aided by improvement in GMs
• Domestic sales – Highlight was Rs300m contribution from Cardio and Diabetes (C&D) segment aided by two recent first to market launches. Mgt remains optimistic on growth outlook for this business.
• gCopaxone - Mylan has improved mkt share from 16-18% to ~30%. DRL’s guidance for delay in its gCopaxone launch to FY21 is a tailwind for Natco / Mylan for FY20 / FY21; gRevlimid – answered all queries and expecting approval over next few months
• RoW sales – See significant pickup in Brazil/Canada over next 2-3 years
• FY20 guidance – Rev growth of 7-8% and PAT growth 8-10%; FY19 profits to double in FY22 based on visibility of settlements / launches

Impact on financials: Reduce FY20 /21 earnings by 4%/3% to account for lower HepC sales

Valuations & view

Natco’s Q1 performance will help to mitigate concerns on sharp earnings erosion post termination of gTamiflu bonanza and is broadly in –line with mgt guidance of 8-10% profits growth with optimistic outlook for FY21 /22. Natco mgt continues to pursue its unconventional growth strategies (agrochemical foray, gErnesto launch in India) to create new medium term growth engines. Recent big ticket FTF on gImbruvica tablets further underlines Natco’s capability to generate unexpected winners. These initiatives add comfort on management’s ability to create new and meaningful growth drivers in the coming years. While gCopaxone scale-up will drive FY20 earnings, gNexavar and gRevlimid launches accompanied with the scale-up in India and RoW markets will keep up the earnings momentum over the next several years. Maintain Outperformer with a TP of Rs860. Tentative approval for gRevlimid will be a key near term upside trigger.