US pipeline, MS drug key to Natco's future

It is difficult to imagine a stock left with some steam after having risen more than 35 per cent in just three days and appreciat ed 2.5 times in the past one year. But the feat seems plausible in case of Natco Pharma, whose stock has rallied on news of the company winning approval to launch in India the generic of Sovaldi, Gilead's drug for the treatment of Hepatitis C.

The company first came into limelight in December 2011 when Dilip Shanghvi picked up a 3.5 per cent stake. In 2012, the company secured India's first compulsory licence to launch the generic version of Nexavar, Bayer's drug for treating liver and kidney cancer.

Natco has built a reputation for launching generic copies in India by challenging the patents of expensive life-saving drugs. The company is a leader with one-third share in the domestic generic oncology market.

There are 15 million estimated patients suffering from Hepatitis C in India. The Sovaldi copy is likely to boost Natco's domestic sales, which predominantly consists of drugs treating cancer. Besides, the licensing agreement with Gilead extends to 90 more countries.

While its domestic business remains the cash cow, the company, through sustained investment in R&D, has built a strong pipeline of products in the US (to be monetised over the next five years). The company has 34 new drug applications filed with US FDA and 22 more are pending. The biggest near-term opportunity for Natco is in the generic form of multiple sclerosis (MS) drug Copaxone, likely to be launched later this year.

Other key limited competition drugs in the pipeline include Revlimid (for treatment of multiple myeloma commanding a market size of $3.500 billion) and Tamiflu (for treatment of influenza with a market size of $600 million).

The company spends over 6.5 per cent of its revenues on research. With a tenfold increase in stock price in the past three years, Natco has managed to create significant wealth for its shareholders. The stock is currently valued at 10 times its past four quarters' revenues -indicating the way the Street has discounted future earnings in the stock price.