Informist, Monday, Mar 13, 2023
By Narayana Krishna
HYDERABAD - Natco Pharma Ltd is exploring inorganic growth opportunities in India and looking to acquire a product portfolio in the oncology, diabetic, and gastro segments, says Chief Executive Officer Rajeev Nannapaneni.
"We have about 10 bln rupees in cash on our books. It is too early to comment on the ticket size or targets, but to answer your question, we are looking for acquisitions to enhance our value and reach. We are actively looking now, but we cannot provide a timeline," Nannapaneni tells Informist in an interview.
Nannapaneni Is Confident Of Launching At Least Four-five Of Such Niche Products In The US Over The Next 10 Years.
"Besides India, we are also looking at other markets including the US, which would enhance our value and reach," he says, while maintaining that "growth will be driven by India, but you need to have a strong India strategy".
Cancer drug generic Revlimid, he says, is expected to contribute to revenues for a few more quarters. The company had launched two additional strengths of Revlimid in the US last week.
Nannapaneni is confident of launching at least four-five of such niche products in the US over the next 10 years. According to the company's Oct-Dec investor presentation, it has launched 26 generic products in the US so far, nine of them being key drugs.
Natco Pharma's high-value generic launches in the US include a generic of the $3-bln cancer drug Revlimid, flu drug Tamiflu, hepatitis drug Hep-C, and sclerosis drug Copaxone. The company aims to file at least 8-10 new generic product applications every year in the US, as well as 10-15 products a year in India.
For the December quarter, the company reported a 22.5% on-year drop in its consolidated net profit at 623 mln rupees and net sales declined 12% to 4.9 bln rupees. The company's India sales fell 1% on year to 1.01 bln rupees.
Nannapaneni says for 2022-23 (Apr-Mar), the company expects consolidated sales of 28 bln rupees, with a consolidated net profit of 7 bln rupees. Analysts, however, peg the numbers slightly lower – consolidated sales at 25.8-26.8 bln rupees and the net profit at 6.6-6.7 bln rupees.
While questions have been raised on the company's growth visibility, these don't perturb Nannapaneni. "If you want jackpots in bigger products, you need to invest and wait for a longer return. But there is an element of volatility when you wait for something large. But when it happens, it always surpasses what you get in a steady state of affairs," he says.
To streamline its revenue model and ensure stability, Natco Pharma has diversified into the agrochemicals sector, and has won a bitter patent battle with US-based FMC Corp on agro chemical product Chlorantraniliprole, termed the CTPR patent.
The company is now launching several agrochemical formulation products with an aim to take agrochemical revenues to 10% of total sales in the next three-four years by launching 8-10 products. It also plans to export agrochemical products, Nannapaneni says, without naming the target geographies. The company expects 1.5-2.0 bln rupees of revenue from this division in the next 12 months.
Nannapaneni, a promoter of Natco Pharma along with his family members, held 48.8% stake in the company as on Dec 31.
Below are edited excerpts from the interview:
Q. How is the India business faring? There seems to be some decline in India business growth.
A. The Indian market is mainly driven by brand building. Research and development is important and, at the same time, marketing is very important. Established brands do much better. I think it is a little bit different from Western markets.
Our domestic business has seen some decline. Hep-C has declined, oncology also seen some decline. Prices are also under pressure. We are doing broadly about 400 crores (4 bln rupees) per year. I think this year, I'm looking to grow the India business by 8-10%. This is organic growth I am talking about. We are also looking for some acquisitions. We are shopping; hopefully, we will get a breakthrough soon.
Q. Are you looking to acquire a company or a targeted portfolio of products?
A. Yes, we are mostly looking to acquire specific products to enhance our reach and product portfolio. Currently, we are primarily present in oncology, with a small presence in cardiology, diabetology, and gastroenterology. We don't have a mass-market presence or a wide range of product segments in India, so acquiring specific products would be beneficial for us.
Q. Any ticket size you are looking at?
A. We have about 10 bln rupees in cash on our books. It is too early to comment on the ticket size or targets, but to answer your question, we are looking for acquisitions to enhance our value and reach. We are actively looking now, but we cannot provide a timeline.
Besides India, we are also looking at other markets, including the US, which would enhance our value and reach.
Q. How do you see revenue growth in the current year and going forward, given the visibility you have on various businesses?
A: We expect 2,800 crore (28 bln rupees) of topline and 700 crore (7 bln rupees) of PAT (profit after tax) for the current fiscal year. For next year, we will come out with the numbers later. We have several challenges ahead, and I don't want to give without getting clarity. I will certainly speak about some numbers by May.
Q. How is the product launch pipeline for India and other markets?
A. I think we have a lot of launches from our portfolio. We are targeting 10 to 15 launches in India per year; new products first in India in FY24. That should boost our revenues. We are targeting 8 to 10 filings in the US per year. More or less, we are meeting that target.
[As on Dec 31, the company had 11 Para-IV filings pending for approval with the US Food and Drug Administration. Para-IV applications allow drug companies to market such products exclusively for 180 days in the US.]
Q: Where do you see the company in the next five years? Can we expect a billion dollars in revenue?
A. Natco will continue to invest in growth and pursue interesting opportunities in the next five years. While a specific revenue target is not set, the company may need to consider a big bang M&A to scale the business. Currently, Natco is expected to achieve revenue of nearly 2,800 crore (28 bln rupees) this year. To achieve substantial revenue growth, multiple factors such as M&A strategy, an acquisition strategy to fill portfolio gaps, geographical expansion, and a strong R&D pipeline are necessary. It is a combination of all these ingredients that will determine the company's success in achieving larger revenue goals. While Natco has a pathway for growth, it is too soon to predict how long it may take or how it will progress.
Q. Natco Pharma's growth has been driven by niche products such as Revlimid. Will this strategy continue to drive growth in the next five years, or do you want to go for diversification?
A. We are diversifying into different countries. We have built good scale in Brazil and Canada, and have started with agrochemicals. We are also considering exporting agrochemicals. Our agro formulations business in India has also contributed significantly this year.
We have given a guidance of about 150-200 crore (1.5-2.0 bln rupees) in sales in the agri-business, and we aim to build more diversified businesses. Focusing on complex generics has always been our strength and core strategy, and it will remain so.
Q. Any blockbuster drugs like Revlimid in the pipeline?
A. We have done big products like Tamiflu, Copaxone, and now Revlimid. I think we will be filing more such products in the future. We have recently announced the filing of a product called Lynparza (cancer drug), and we possibly have a first-to-file opportunity on that. We will continue to file such products. To succeed, we need to have good and complex filings, and a good diversified business strategy.
Q. How many of such big products will hit the market? Any timelines?
A. I think that in the next decade, Natco will bring at least four-five complex generic ideas to the market. That is our goal. The ideas could be related to peptide chemistry, oncology, or hard-to-make drug releases. Even though a 10-year horizon is quite long, it takes about 8-10 years to plan, execute, and achieve success in this business. We have a clear vision of a 10-year pipeline for our complex generics business in the US.
Q. How is Revlimid doing, given the greater competition and price erosion?
A: Overall, the Revlimid portfolio is doing well...and meeting our expectations. I don't want to talk further on this product. I think we are going to do well with Revlimid in Jan-Mar of this year and Apr-Jun of next fiscal year too.
Q: What is Natco Pharma's US strategy, particularly in terms of marketing, after the acquisition of front-end company Dash Pharma?
A: We acquired Dash Pharma a year ago, and through this acquisition, we are launching our own portfolio in the US. We have already launched a couple of products this year and will be launching more through our front-end company. Previously, we used to launch products through profit-share agreements with distributors but now, we are doing it directly through our own front-end. For competitive products, we use our own front-end and for complex generics, we sometimes go with partners.
[In January 2022, Natco Pharma acquired pharma retail distribution company Dash Pharmaceutical LLC for $18 mln].
Q. Why did Tamiflu fade out despite more flu cases in the US?
A. Basically, it is about pricing. Lot of generics joined in that segment and obviously, pricing went down significantly. It is not viable to do that product with that kind of pricing.
Q. Given the performance in Oct-Dec and the overall post-COVID environment, how do you see industry growth going forward?
A. I think the industry has a lot of overcapacity and strong price competition in major regulated markets. You need a smart strategy to survive in this business.
Our thinking is that we should do more complex generics and more niche generics, and at the same time have a large portfolio approach to survive in this business. As long as you have these special products, you will experience growth. Otherwise, it will be very difficult to thrive in this business.
Q. The overall business environment has seen significant changes such as US supply chain issues, consolidation, pricing pressure, and changes in the generics market. How do you think the overall industry is performing?
A. I think what has happened in the US is that buyers have consolidated, while the supply-side has primarily remained the same. We now have a (distribution) front-end in the US (in the form of Dash Pharma). So, supply chain consolidation will not affect us.
Q. What about consolidation in terms of takeovers and acquisitions? What are the challenges for Indian companies?
A. Consolidation (takeover of companies) has not happened in India. There are multiple reasons for this. First, many Indian companies are family-owned. Second, I believe the balance sheets of Indian companies are very healthy compared to global players in the generic business. All Indian companies have done well in the recent past.
The real challenge is achieving growth. All Indian companies have stable cash flows, and many of them have very low leverage. For consolidation to happen, there needs to be some financial distress. I don't think Indian companies have faced that situation yet. Challenges have arisen in achieving growth. We have been facing difficulties in this area. Otherwise, the current structure will remain the same.
Q. Will Indian pharmaceutical companies continue to rely on the US market as a major source of growth, or are there alternative markets that could drive growth?
A. I think the business model (of Indian companies) for the next decade will revolve around India. I strongly believe that growth will be driven by India, but you need to have a strong India strategy. That's why you are seeing consolidation in the Indian industry. Many brands are being bought in India. Indian companies need to have a strong growth strategy for the domestic market. Apart from India, the rest of the world's (non-US) markets are also growing fast. Indian companies need to have a strong strategy for these markets too.
In our case, we are entering the agrochemicals business, which is a bit of diversification from our core business, so that we can have a diversified set of revenues. The US is still an important market for us. I think we will continue to do well, but the real value will come only from hard-to-make generics. Despite looking at alternative markets, we can't ignore the US.
Q. How do you view the European market, given the supply issues, drug shortages, and the pricing problems there?
A. We have some limited presence in Europe. But whatever I understand, Europe is again a competitive market; lots of price challenges. I think, at the end of the day, if you have a good product, a complex product and are the first to launch, you will always make money. You need to have strong R&D. When you are in the export business, this is the most important thing.
Q. Natco Pharma's revenues have been volatile all these years. When can investors expect a stable revenue stream without compromising on growth?
A. We have replaced our core business worth 700-800 crore (7 bln-8 bln rupees) with new products and molecules, which is a huge shift. The export business is always a declining business, and we have to keep adding products. We are diversifying a lot and need to do more to bring stability to our business. However, our strategy of focusing on complex generics will not go away.
Our balance sheet brings in a lot of volatility in our earnings. We have one good year and the next, we don't have it, whenever a launch happens. That is the nature of the business, but I always feel this works for us; and what works for you, you do more. It is a conviction of what you are doing. If you are obsessed with having stable earnings, you will forego growth, and then you are doing things that give you lower returns, but you are getting stability.
If you want jackpots in bigger products, you need to invest and wait for a longer return. But there is an element of volatility when you wait for something large. But when it happens, it always surpasses what you get in a steady state of affairs. But that requires some vision, patience, and a strategy. I think all of that, as a company, we need to have; as investors, you need to have. Only then it works.
Q. What is the strategy for the agrochemicals business?
A: Our current focus in the agrochemicals business is the launch of CTPR (Chlorantraniliprole) and its combinations in India, which we believe has great potential. We have a strong sales force throughout the country and are exploring both B2B partnerships and our own front-end for these products. We expect this business to perform well and have a good pipeline of products planned for the next three-four years, with a target of launching 8-10 products. In the long run, we expect this business to contribute around 10% to our total revenues. In the next 12 months, we expect 150-200 crore (1.5-2.0 bln rupees) of sales in the agricultural business.
Q. How are Canada and other markets doing?
A: Canada is doing well. This year, we will record revenues of C$40 mln in Canada; in Brazil, we may get $15 mln. Very stable.
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