Natco Pharma's Q2FY20 results (Outperformer) - Soft quarter; Domestic formulations disappoint
Q2FY20 result highlights
- Consol revs came at Rs4.9bn vs est Rs5.3bn; yoy numbers are not comparable due to significant share of gTamiflu sales in the base
- Exports sales came at Rs2.2bn inline with est; Q1 was Rs2.1bn – gCopaxone and gDoxil continue to be the primary driver
- Domestic formulations sharply declined (-26% qoq) to Rs1.2bn vs est Rs1.8bn due to lower oncology and CnD sales. HepC sales flat qoq
- EBITDA came at Rs1.3bn vs est Rs2bn; Q1 was Rs1.9bn. EBITDAM at 27.7% vs est 37.1% mainly due to a sharp fall in GMs
- GMs stood at 75.5% vs est 83%; Q1 – 84.6%. Mgt attributed this decline to weak domestic sales and stocking (~Rs500m) of gTamiflu at cost in anticipation of flu season. Adj GMs – ~82%.
- gRevlimid – answered all queries; expect approval by Q4 in US
- Agrochem – Filed for regulatory approval of first big ticket product in India (details in the note); likely launch in FY21 subject to approval / litigation outcome
- Update on FY20 guidance – Original guidance - Rev growth of 7-8% and PAT growth 8-10%; H1 performance is lagging guidance due to lower growth in India and Canada / Brazil. In our view, guidance likely to be met only if mgt settles its gRevlimid patent litigation in Canada vs opting for a trial; Potential contribution from the product will likely get deferred to FY21e in case mgt opts for a trial.
Impact on financials: We reduce our FY20e earnings est by 17%. There could be upsides in case Natco settles its Canadian gRevlimid litigation.
Valuations & view
Natco’s H1 performance is lagging its FY20E guidance due to weakness in India as well as Canada / Brazil and underlines the uncertainties inherent in its unconventional business model. Despite this miss, Natco mgt continues to pursue its unconventional growth strategies to create new medium term growth engines. Recent big ticket agrochemical filing, niche CnD launches in India and FTF on gImbruvica tablets in US underline 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. Maintain Outperformer with a TP of Rs860. Tentative approval for gRevlimid in US will be a key near term upside trigger.
Natco Pharma Limited is a pharmaceutical company. The Company is engaged in developing, manufacturing and marketing finished dosage formulations (FDF) and active pharmaceutical ingredients (APIs). The Company's segments include active pharmaceuticals ingredient, finished dosage formulations, job works, pharmacy and others. The Company's product categories include Domestic Formulations, International Formulations, API's and Blockbusters. The Company's products include Alphalan, Bandrone, Bendit, Clokeran, Lenalid, Thioplan, Anastronat, Capnat, Fulvenat, Kabanat, Natdox-LP, Rapact, Temonat, X-Trant, Glatimer, Hepcinat, Natdac, Natzold, Tigi, Alprazolam, Chloroquine Phosphate, Lansoprazole, Letrozole, Granisetron, Rizatriptan IR, Imatinib, Salmeterol Xinafoate, Sertraline Form I, Ibandronate Sodium Monohydrate, Pantoprazole Sodium Sesquihydrate, Ondansetron Hydrochloride (Injectable Grade), Daclatasvir and Glatiramer Acetate. The Company manufactures over 20 products under contract.
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