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Natco Pharma’s high-stakes game of risk and reward. Will it pay off?
Summary
After a stellar FY24 performance, Natco Pharma’s stock has taken a hit. What’s next for the company as it faces crucial challenges in the US generics market and beyond?
Natco Pharma Ltd isn’t your run-of-the-mill pharmaceutical company. It’s a story of calculated risks, high-stakes bets, and a fair bit of drama.
At the heart of this journey is Rajeev Nannapaneni, the company's vice-chairman and CEO, whose leadership has shaped the company's aggressive strategy.
Under Nannapaneni’s guidance, Natco has embraced litigation-heavy patent challenges to pursue niche markets, particularly in the US generics space. This strategy has not only brought in substantial rewards but also recurring challenges. It has been a rollercoaster ride, but for Natco, more often than not, it has paid off.
FY24 performance
Natco’s performance in FY24 is a testament to the company’s high-risk strategy.
The company reported revenues of ₹3,998 crore, marking an impressive 47% year-on-year growth. With Ebitda margins at a robust 45.5%, investor sentiment surged, driving the stock up by over 80% between January and August 2024.
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However, after peaking at an all-time high of ₹1,592 in September, the stock has declined by more than 15%, prompting the question: What lies ahead for Natco?
To answer that, let’s dive deeper into Natco’s business model and the factors at play.
Strategy playbook
At the core of Natco’s strategy is its play in the US market, specifically leveraging the Hatch-Waxman Act. This law allows generic drugmakers to challenge patents on high-value drugs.
If Natco manages to be the first to challenge a patent (via a Paragraph IV certification), and it wins, the company gains a 180-day exclusivity period to sell its generic version. This gives Natco a huge financial advantage by allowing it to capture market share before other generics companies can enter.
Currently, Natco has 30 Paragraph IV applications in the pipeline, with 13 already approved. However, this strategy is not without risks. Legal battles are long and costly, and delays or losses in court can derail its plans. Despite these challenges, Natco has managed to navigate these waters, with the most notable success being the generic version of Revlimid, a cancer drug that has been central to the company’s growth.
Revlimid: A double-edged sword
Revlimid, the blockbuster cancer drug, is the primary driver behind Natco’s financial performance in recent years. The company’s exclusive US launch of the generic version has transformed its fortunes. This exclusivity, which lasts until January 2026, gave Natco a significant advantage, allowing it to enjoy limited competition and near-monopoly margins.
However, the expiration of this exclusivity looms large. Once it ends, generic players will flood the market, leading to a potentially drastic drop in prices and margins.
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According to a report by Edelweiss, Natco’s earnings are projected to halve by FY27 following the expiration of Revlimid’s patent in January 2026. By that time, Revlimid’s market share is expected to shrink to one-third. While the company has several products in its pipeline, management has acknowledged that their future contribution to earnings remains uncertain.
This situation mirrors past experiences, such as when Tamiflu lost its exclusivity, causing a sharp decline in revenues. Investors fear that Revlimid’s expiration could trigger a similar slump.
Risk of history repeating itself
Natco’s journey is dotted with instances where its blockbuster products have faced challenges after losing exclusivity. The most notable example is Tamiflu, the flu medication, which saw revenues collapse once patent protection expired.
When new products couldn’t replace this lost revenue, Natco posted its first-ever quarterly loss in 2021-22. Its revenue declined from ₹1,136 crore in FY18 to ₹933 crore in FY20.
Now, with Revlimid facing a potentially similar fate, Natco’s investors are understandably anxious. The company’s reliance on a handful of high-margin, niche drugs has left it vulnerable to such cyclical downturns. In the generics space, Natco’s success depends on a few specialised products and risk-sharing partnerships with larger players.
‘Binary Bets’
Nannapaneni’s approach to business can be summed up in one phrase: binary bets. A binary bet has two possible outcomes: either it succeeds spectacularly or fails completely.
Natco’s investment in the US-based biotechnology company eGenesis is a prime example. The company’s Canadian subsidiary invested $8 million in eGenesis, a firm working on xenotransplantation—using non-human cells, tissues, or organs for human medical treatment.
If eGenesis succeeds, it could become a major business for Natco. If it fails, however, that $8 million investment could be a complete loss. This high-stakes mentality extends beyond biotechnology.
In the generics space, Natco has placed its bets on drugs like semaglutide, a treatment for diabetes and weight loss. More on this in a bit.
Role of Paragraph IV filings
The Hatch-Waxman Act’s Paragraph IV filings are crucial to Natco’s strategy. These filings allow Natco to challenge patents and secure 180-day exclusivity. The company has 28 Paragraph IV applications in its pipeline, with 13 already approved. Promising applications include semaglutide, Olaparib (for ovarian and breast cancer), and a semaglutide pen for weight loss.
Semaglutide might just be the crown jewel. Marketed as Ozempic for diabetes and Wegovy for weight loss, this "miracle drug" is a global blockbuster.
The company has secured sole first-to-file (FTF) exclusivity under Paragraph IV for all strengths of Wegovy and for key strengths of Ozempic, including the lucrative 8mg/3ml and 2mg/3ml versions. This means that if Natco clears all legal hurdles, it will have a 180-day monopoly in the US generics market for these variants.
To top it off, Natco has partnered with pharma giant Mylan. Mylan will handle front-end operations in regulated markets like the US. Natco retains some global rights.
Even if the stars align and Natco secures the 180-day exclusivity, the big payday isn’t expected until 2030. That leaves a critical question—what happens between FY26 and FY30?
You see, Natco’s blockbuster Revlimid exclusivity ends in FY26, and there’s a revenue gap to fill before semaglutide’s US launch. Analysts suggest the Indian market could be a saving grace.
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Natco is already gearing up to launch semaglutide generics domestically once the patent expires in March 2026. Early approval in India could help the company. It could meet the rising demand for diabetes and weight-loss treatments. This might bridge the interim revenue gap.
And it’s not just about India. Mylan's global reach and expertise should boost semaglutide's sales. CDMO Stelis Biopharma will also share profits from the deal.
So, while Natco’s ambitions in the weight-loss and diabetes markets are monumental, the road ahead is paved with challenges. The final outcome will depend on a mix of regulatory clearances, market strategies, and perhaps a little bit of luck. But if it all works out, Natco could be looking at a blockbuster payday that reshapes its future.
High-risk, high-reward strategy
When it comes to navigating the pharmaceutical industry, Natco Pharma has a game plan that’s both daring and calculated.
While many companies play it safe in the fiercely competitive US market, Natco takes the road less travelled, focusing on niche products with fewer competitors but high margins. By leveraging Paragraph IV filings, it gains an edge by challenging patents and seeking early entry into profitable markets.
However, this isn’t without its challenges. Litigation costs, regulatory hurdles, and distribution complexities in the US can drain resources. To mitigate these, Natco relies on partnerships. For instance, it collaborated with Mylan for generic Copaxone and Alvogen for Tamiflu. But partnerships aren’t the only strategy—Natco’s acquisition of Dash Pharma strengthened its US front-end presence, giving it better control over distribution.
Back home in India, Natco’s focus is clear. The domestic portfolio primarily comprises oncology products, with 39 brands under its belt. This specialisation aligns with its expertise and ensures a steady revenue stream.
For more such analysis, read Profit Pulse.
On the operational front, Natco’s infrastructure speaks volumes about its scale and ambition. It owns six finished dosage formulation (FDF) facilities, two active pharmaceutical ingredient (API) plants, and two crop health sciences units, reflecting a diversified yet focused approach to business.
In essence, Natco Pharma thrives on balancing high-risk ventures in international markets with a solid foundation in India, making it a textbook example of a high-risk, high-reward strategy.
Road ahead
Natco’s journey is a testament to high-risk, high-reward decision-making. From overcoming early struggles to establishing itself as a leader in the generics market, the company has displayed remarkable resilience and adaptability.
However, with the expiration of Revlimid’s exclusivity looming and the potential windfall from the 180-day exclusivity period still on the horizon, Natco now faces its toughest challenge yet.
Disclosure: We have relied on data from www.Screener.in throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.
The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.
Author Sonia Boolchandani is a seasoned financial content writer with over four years of experience in delivering clear, engaging, and insightful content on various financial topics. Her work is driven by a passion for helping readers understand and make informed decisions in the financial world, bridging the gap between industry intricacies and reader-friendly explanations.
Disclosure: The writer holds shares in the company discussed in the article.
