NATCO has corrected 30% in 6m led by lower Copaxone profits and concerns on near-term earnings. At the current price, it is trading at 22x FY20e EPS ex US and no value to US pipeline ex Revlimid.
US – while there are a lack of key launches in near term, Copaxone could remain a steady profit source and scale up from FY21 should be significant with 19% earnings CAGR over 3years. India and RoW revenues will also grow at 20% CAGR post FY20e with improving margins. ‘Buy’.
NATCO has been diversifying outside the US and investing ahead of peers in India and RoW for the past 3 years. We expect the benefits of these will accrue over the next 3 years driving a 20% revenue CAGR in these businesses with improving margins.
NATCO is following its strategy of patent challenges/first time launches in India in the cardio and diabetes portfolio. While the initial two launches have been injuncted, we expect these to be lifted/settled in FY20 and along with other launches drive growth. The company is targeting tier-I/II cities, especially hospitals where it has strong connect.
Brazil and Canada – It has filed multiple products in these two geographies which should see approval over FY20/21, driving growth. Both are now Ebitda break-even and new product approval including Copaxone would drive strong growth and margin improvement.
We expect revenues to grow 2x over FY19-21. The key concern near term is the muted US pipeline over the next 2 years and disappointment in Copaxone. We though believe the current stock price undervalues the US pipeline. NATCO has now crossed 30% market share in Copaxone and this will be a long tail product in our view.
Additionally, post H1F21, we expect the launch pace to pick up driving FY22 EPS to 1.7x FY19.
The key triggers for the stock near term are (1) Revlimid approval (CY19), (2) DRRD Revlimid settlement/case ruling (late CY19/early CY20), (3) Brazil Copaxone approval (CY19), and (4) India C&D ramp-up. Of these, any settlement by DRRD on Revlimid would be a key positive for NATCO.