Natco Pharma - Weak quarter; key opportunities intact - ICICI Securities

Natco Pharma's (Natco) reported Q3FY21 performance was much lower than estimates with a miss in India and US revenues. Additionally, weak flu season impacted the Tamiflu sales. Revenue declined 26.3% to Rs3.6bn while adjusted PAT dropped 46.3% to Rs627mn (I-Sec: Rs1.1bn). EBITDA margin was also down 660bps YoY to 23.2% due to low revenue. Continued pressure on domestic oncology segment (~70% of pre-COVID levels) and negligible Tamiflu sales in US were key reasons for weak quarter. 

However, this doesn't change the FY22-FY23 outlook materially in terms of key product opportunities like Revlimid, Nexavar, Afinitor, etc. Considering ~15% fall in stock price since our downgrade in Dec'20 that has made valuations reasonable, we upgrade Natco to ADD from Hold with a revised target price of Rs945/share.

- Revenue miss across India and US: Export formulation revenue (primarily from the US) were down 26.4% due to absence of Tamiflu sales on account of weak flu season and absence of new launches. Quarterly revenue run-rate has generally been volatile but we believe revenue should revert to ~Rs2-3bn in Q4FY21. We expect delay in competition for generic Copaxone would support the US revenue run rate. ROW markets (Canada & Brazil) revenue would gradually ramp-up aided by new launches including Revlimid. Domestic revenue declined 37.7% YoY due to lower hospital occupancies for cancer treatment and declining Hep-C sales. The business is likely to recover with improving occupancies. APIs grew steady 5.7%.

- Margins weak due to lower revenue: EBITDA margin dropped 660bps YoY to 23.2% on account of significant miss on revenue. However, with gradual pick-up in revenue and high quality product launches in FY22E would help EBITDA margin to revert to ~30%. We believe base EBITDA margin would remain stable at ~30% in the near future. Further delay in Copaxone competition and market share gain would provide an upside to our margin estimates.

- Update on agro-chemicals opportunity: Natco recently received approval for indigenous manufacture of chlorantraniliprole (CTPR) technical which is formulated into broad-spectrum insecticides used in several crops for better pest management. CTPR is currently sold under the brands Coragen and Ferterra which have cumulative market size of ~Rs20bn. We assume Natco would launch this product in FY22E and expect revenue of Rs1.6bn in FY22E and Rs2.7bn in FY23E.