Wednesday, June 20, 2012

>NATCO PHARMA: Copaxone remains the key value driver:

Risk-reward remains favourable
􀂄 Strong operating performance in FY12: Natco posted 15% sales growth forFY12 at `5.2bn. During FY11, the company had divested one retail pharmacy store in US (sales of $10mn). Excl the US retail sales, underlying sales were stronger at 27%. EBITDA at `763mn was up 25% YoY while margins at 14.7% were higher 120bps YoY. The margin increase was driven by better product mix (lower US retail). Adjusted net profit at `596mn was up 2.8% YoY primarily due to higher taxes (at 26.1%). Domestic oncology sales at `1.5bn grew by 22% YoY driven by both volume and price increase.

􀂄 Base business earnings to be steady: We expect base business earnings to witness 9% CAGR for FY12-14 with FY13/14 EPS at `20/`22.9. We expect FY13/14 sales growth to be 11%/13% with EBITDA margins at c.20%.

􀂄 US opportunities to unfold in FY13; Copaxone remains the key value driver: We estimate NPV value/share of `275 for the 4 US opportunities. The earliest of the US launches will likely be Lansoprazole (Rx/OTC; `11/share) expected in FY13. Lanthanum launch is likely in FY14 (`13/share). The district court decision in the Copaxone litigation is expected near-term. Our NPV value of `160/share assumes 75% probability of launch reflecting the regulatory approval risk. We see a tentative approval for Natco’s filing as a key trigger which will raise the probability to 100% (independent of the litigation outcome; full value of `213/share). Our estimates for Copaxone are conservative and assume a 4-5 player market – earlier launch can provide upside to JMFe. Lenalidomide (at 75% probability) accounts for an NPV value of `91/share – although timelines are stretched.

􀂄 Maintain BUY; raise Mar’13 TP to `458 (from `375): We raise our FY13E EPS by 13% to `20.0. We introduce FY14 EPS of `22.9. Our Mar’13 TP of `458 is based on 8x FY14 base EPS and `275 for the US opportunities. Given litigation/regulatory actions expected in the near term, we see the risk-reward as favourable for the stock. Maintain BUY. Risks to our call are delay in approvals and negative outcome in litigation.