Natco Q1FY18 was better than expected led by higher Tamiflu profit share. India was down 20% y-o-y due to GST but management expects recovery in Q2FY18. Key though were management comments that it is refocusing R&D towards India and RoW and away from US markets and would work on selective niche products in the US. Natco appears best placed among peers in the US and comments that the US market has deteriorated sharply implies significant pressure for the rest of the sector.
Results better than expected
Natco reported results ahead of expectation with revenues 9% and margins 770bps ahead of expectation. The beat was led entirely by higher profit share ($14 m vs JEFe $5 m). Management indicated that $11 m of profit share was from Tamiflu which is non-recurring. Excluding this, the results were in line with expectations.
Base business impacted by GST
Q1FY18 results saw a significant impact from GST. Domestic business was down 20% y-o-y led by a 20% q-o-q dip in HEP-C portfolio. Management indicated that it expects a rapid recovery in Q2 and will provide updated guidance on the various businesses in Q2FY18. Oncology business was flat y-o-y. Hep-C exports were also muted due to delays in export clearance.
US generics market has deteriorated; reducing focus
The key comment on the call was on its future outlook and strategy. Management indicated it is reducing R&D spend in the US from 50% of total R&D to 25%. This is driven by the changed dynamics in the US (led by competition and channel consolidation). Management indicated it is becoming more selective in its US filings, and sees higher potential in India and RoW. The comments imply US filings for NATCO will be more selective going forward.
Copaxone key near-term trigger
Management indicated it is waiting to hear back from the FDA on Copaxone and believes 20mg launch this year is still possible. Gbosentan is slated for a FY19 launch. It has Target action date on gTamiflu suspension for Q3FY18. In the domestic business it expects the diabetes and cardio portfolio at Rs 1 bn+ in FY19.
Strong R&D and complex focus; best placed among peers
We believe Natco’s strong R&D team, complex specialty focus pipeline and lack of significant FDA issues makes it one of the best placed Indian pharma companies. Unlike peers, it is not impacted by price erosion in its base business. We believe its strategy of a niche US focus and emphasis on India and EM should lead to better returns. Management comments on the US business appear to have negative implications for the rest of the sector which is heavily reliant on generic US business for growth and earnings. Natco has focused on complex products and together with its comments on the US market we see further risk to earnings for the rest of the sector.