* Delivers strong 91.3% return since initiation nine months ago; downgrade to Neutral on expensive valuation:
We had initiated coverage on Natco Pharma (Natco) through a viewpoint report dated June 8, 2016 on expectation of an exponential growth on the back of a strong product pipeline. In line with our assumption, the company has posted a strong operating performance in 9MFY2017, with revenue growing by 95% YoY growth and reported profit growing by 223% YoY (propelled by exclusivity sales of gTamiflu in Q3FY2017, which will continue in Q4FY2017 also). Consequently, the stock has delivered a strong return of 91.3% from the day of our viewpoint initiation. We now downgrade our view on Natco to ‘Neutral’, as valuation is stretched (currently the stock trades at 24.2x FY2019E EPS).
* gCopaxone key opportunity but timely approval and US court ruling will be crucial to watch:
Copaxone 20mg is a short-term opportunity for Natco (as no more litigations are pending), and the company is awaiting the USFDA’s approval for the product, which we expect to come in the next 2-4 months (making it a potential H2FY2018 launch). Recently, a US District Court has invalidated four orange book-listed patents on Copaxone 40mg, while a ruling from the Patent Tribunal Appellate Board (PTAB) is due in May 2017 on these four patents. Teva has indicated that it will appeal against the decision in a US Federal Court, and if the appeal is accepted it may take another 12-18 months to get a court verdict (further delaying the launch of Copaxone 40mg to CY2018/CY2019, ie H2FY2019). Also, there are five companies that have First-to-File status for Copaxone 40mg (but two companies have USFDA regulatory issues at their manufacturing sites). Therefore, the timing of the USFDA approval and court ruling will largely determine the competitive intensity in the molecule and may lead to revision in FY2019 estimates accordingly.
* View downgraded to Neutral:
Notwithstanding the multiple mid-size opportunities for Natco in the US and the company’s resilience to the nagging issues facing the Indian Pharma sector (pricing pressure in the US, increased competition and USFDA issues), the stock valuation currently looks stretched (the stock trades at 24.2x its FY2019E estimates). Therefore, we downgrade our view on Natco from ‘Positive’ to ‘Neutral’. We shall review our estimates and outlook on the stock post the Q4FY2017 earnings announcement, management concall and commentary.
* Key risks:
Any delay in approvals from the USFDA and negative outcome of the USFDA inspection of plants could impact future revenue and profitability of the company significantly.
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