Wednesday, August 6, 2008 Ashish Chugh, Investment Advisor
Natco Pharma - a Discovery led pharma company with strong R&D capabilities, with potential for significant increase in revenues on account of the company’s entry into retail pharma space in US and its tie-up with Mylan Inc. and with the additional cushion being in the form of land bank valued more than the company’s current market cap, is attractive at the current PE of 6.Natco Pharma was promoted by Mr V.C. Nannapaneni in the year 1981 as a Private Limited Company to be in the business of Research, Developing, Manufacturing and Marketing of Pharmaceutical Substances and Finished Dosage forms for Indian and International markets. NATCO PHARMA began operations in 1984 in Andhra Pradesh, India. The company which began operations with one manufacturing plant and 20 employees today has four manufacturing facilities and 1500 employees. NATCO also has the credit of being one of the largest contract manufacturers in India.Some of the well-known companies like Ranbaxy, Dr. Reddy's Laboratories, John Wyeth etc. get their products manufactured by NATCO. The company’s bulk drug and Intermediate facility at Mekaguda, in Andhra Pradesh is certified for its environmental management systems (ISO-14001) and is US-FDA approved plant.
Natco Pharma is a leader in the Oncology segment and is ranked No.1 amongst Indian companies in the Oncology segment in terms of revenues from the domestic market. Strong Research Base:
The company has a strong research base and has developed various Oncology and non-Oncology drugs. As a recognition of its strong research capabilities, the company has recently been conferred the National Award -2008 by Technology Development Board, Government of India, Ministry of Science and Technology for indigenous technology developed by the company in life saving anti-cancer drugs.
New drug discovery: The company has developed a new molecule NRC 19 for treatment of Chronic Myelogenous Leukemia (CML) which is cancer of the blood in which too many granulocytes, a type of white blood cell, are produced in the marrow. The company has applied for Phase I of Clinical Trials. Successful clinical trials and commercialization of the Drug will lead to substantial benefits for the company
Acquisition of pharma retail companies in US: The company has been increasing its presence in Pharma Retail in US through the inorganic route. The company has over the past year and a half acquired three Pharma Retail chains in the US – Savemart Drugs, Nicks Drugs and Newark Drugs. These stores are capable of adding Rs.150 crores towards Sales Revenues for the company in a year. The company is scouting for more acquisitions in this space in the US.
Tie-up with Mylan Inc: The company has recently entered into a Tie-Up with the Pittsburgh based Mylan Inc., for worldwide marketing and distribution of Glatiramer Acetate. The drug is sold as Copaxone R - a registered trade mark owned by Teva Pharmaceutical, Israel. Natco has signed a license and supply agreement today with Mylan for its (NATCO's) Glatiramer Acetate pre-filled syringes, a generic version of Teva's Copaxone R, which is used to treat multiple sclerosis. The agreement grants Mylan exclusive distribution rights in the United States and all major markets in Europe, Australia, New Zealand, Japan and Canada, and includes an option to expand into additional territories. Teva’s market cap and profitability is a function of Copaxone, which, with brand sales of nearly $2 billion officially, returns a profitability of 50%-70%.
Land bank near Hyderabad Airport: The company has substantial land bank near the Hyderabad Airport (close to 300 Acres). As per a few press reports of Dec 2007-Jan 2008, the land is valued at around Rs.350 crores. Factoring a possible decline that might have taken place in land values in view of the recent real estate slowdown, the land may be valued at around Rs.250 crores on a conservative estimates - this is more than the current market cap of the company.
Natco Pharma is a leader in the Oncology segment and is ranked No.1 amongst Indian companies in the Oncology segment in terms of revenues from the domestic market. Strong Research Base:
The company has a strong research base and has developed various Oncology and non-Oncology drugs. As a recognition of its strong research capabilities, the company has recently been conferred the National Award -2008 by Technology Development Board, Government of India, Ministry of Science and Technology for indigenous technology developed by the company in life saving anti-cancer drugs.
New drug discovery: The company has developed a new molecule NRC 19 for treatment of Chronic Myelogenous Leukemia (CML) which is cancer of the blood in which too many granulocytes, a type of white blood cell, are produced in the marrow. The company has applied for Phase I of Clinical Trials. Successful clinical trials and commercialization of the Drug will lead to substantial benefits for the company
Acquisition of pharma retail companies in US: The company has been increasing its presence in Pharma Retail in US through the inorganic route. The company has over the past year and a half acquired three Pharma Retail chains in the US – Savemart Drugs, Nicks Drugs and Newark Drugs. These stores are capable of adding Rs.150 crores towards Sales Revenues for the company in a year. The company is scouting for more acquisitions in this space in the US.
Tie-up with Mylan Inc: The company has recently entered into a Tie-Up with the Pittsburgh based Mylan Inc., for worldwide marketing and distribution of Glatiramer Acetate. The drug is sold as Copaxone R - a registered trade mark owned by Teva Pharmaceutical, Israel. Natco has signed a license and supply agreement today with Mylan for its (NATCO's) Glatiramer Acetate pre-filled syringes, a generic version of Teva's Copaxone R, which is used to treat multiple sclerosis. The agreement grants Mylan exclusive distribution rights in the United States and all major markets in Europe, Australia, New Zealand, Japan and Canada, and includes an option to expand into additional territories. Teva’s market cap and profitability is a function of Copaxone, which, with brand sales of nearly $2 billion officially, returns a profitability of 50%-70%.
Land bank near Hyderabad Airport: The company has substantial land bank near the Hyderabad Airport (close to 300 Acres). As per a few press reports of Dec 2007-Jan 2008, the land is valued at around Rs.350 crores. Factoring a possible decline that might have taken place in land values in view of the recent real estate slowdown, the land may be valued at around Rs.250 crores on a conservative estimates - this is more than the current market cap of the company.
Financials:
Qtrly-Latest results(Rs in Cr.) Particulars Quarter Ended Quarter Ended Quarter Ended Year Ended Year Ended Year Ended (Jun 08) (Jun 07) (% Var) (Mar 08)(12) (Mar 07) (12) (%Var) Sales 56.51 53.83 5 227.88 180.22 26.4 Other Income 7.12 4.92 44.7 31.95 33.29 -4 PBIDT 15.79 13 21.5 71.64 49.73 44.1 Interest 3.01 2.22 35.6 8.5 5.69 49.4 PBDT 12.78 10.78 18.6 63.14 44.04 43.4 Depreciation 2.7 2.4 12.5 8.59 7.61 12.9 PBT 10.08 8.38 20.3 54.55 36.43 49.7 Tax 2.4 1.31 83.2 14.5 5.96 143.3 Deferred Tax 0 0 - 0 0 - PAT 7.68 7.07 8.6 40.05 30.47 31.4
(Source: Capitaline) Latest Data As On 04/08/2008 Latest Equity(Subscribed) 28.04 Latest Reserve 197.48 Latest Bookvalue -Unit Curr. 80.43 Latest EPS -Unit Curr. 12.28 Latest Market Price -Unit Curr. 74.15 Latest P/E Ratio 6.04 52 Week High -Unit Curr. 179.4 52 Week High-Date 39448 52 Week Low -Unit Curr. 61.05 52 Week Low-Date 39650 Market Capitalisation 207.92 Stock Exchange BSE Dividend Yield -% 1.69
Natco Pharma is a leader in Oncology segment and has strong research capabilities. The acquisition of pharma retail chains viz – SaveMart Drugs, Nicks Drugs & Newark Drugs would lead to addition of Rs 150 crores in the revenues. The company infact is scouting for more acquisitions in this space. The company’s recent tie-up with Mylan Inc for worldwide marketing and distribution of Glatiramer Acetate, which is the generic version of Copaxone R owned by Teva Pharmaceuticals, may lead to significant addition to the company’s Topline and Bottomline. This however may be a long drawn process (may take 2-3 years) since regulatory and legal hurdles have to be crossed before the sales of the drug could start – Mylan Inc is expected to spend between $ 20-30 mn for regulatory approvals and clinical studies. Many analysts opine that Israeli major may try to block the launch of the product by dragging both Mylan and Natco to court since Teva is being threatened of its m onopolistic position and may try and block the sales through legal route. The near term growth for the company, however is expected to come from the domestic Oncology segment where the company expects to grow at 20%.
Natco Pharma achieved Sales and PAT of Rs 228 crores and Rs 40 crores respectively for FY 08. This results in an EPS of Rs 12.28. The stock thus trades at a PE of 6. The icing on the cake however is the land bank which the company has near Hyderabad Airport – valued at Rs 250 crores on conservative estimates, is more than the current market cap of the company. Given the company’s current market cap of Rs.208 crores, there is thus a margin of safety or a cushion available incase of any adversity.
The stock available at a PE of 6 with company’s strong R&D capabilities, new Drug Discovery, potential for significant increase in revenues on account of the company’s entry into retail pharma space in US and its tie-up with Mylan Inc. and with the additional cushion being in the form of land bank valued more than the company’s current market cap, merits investment at the current levels.
Natco Pharma achieved Sales and PAT of Rs 228 crores and Rs 40 crores respectively for FY 08. This results in an EPS of Rs 12.28. The stock thus trades at a PE of 6. The icing on the cake however is the land bank which the company has near Hyderabad Airport – valued at Rs 250 crores on conservative estimates, is more than the current market cap of the company. Given the company’s current market cap of Rs.208 crores, there is thus a margin of safety or a cushion available incase of any adversity.
The stock available at a PE of 6 with company’s strong R&D capabilities, new Drug Discovery, potential for significant increase in revenues on account of the company’s entry into retail pharma space in US and its tie-up with Mylan Inc. and with the additional cushion being in the form of land bank valued more than the company’s current market cap, merits investment at the current levels.
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