NATCO Pharma Limited (NATCOPHARM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Natco Pharma Q4 and FY '24 Earnings Conference Call hosted by Batlivala & Karani Securities India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Hrishikesh Patole from Batlivala & Karani Securities India Private Limited. Thank you, and over to you, sir.

Hello. Good morning, everyone. On behalf of B&K Securities, I welcome you all to the Q4 FY '24 earnings conference call of Natco Pharma. I hope everyone is in good health and doing well. On behalf of NATCO, today, we have with us Mr. Rajeev Nannapaneni, Director and CEO; Mr. Rajesh Chebiyam, Executive VP, Crop Health Science. I now hand over the call to Rajesh for the management's opening remarks, post which we'll open the session for Q&A. Over to you, Rajesh.

Thank you, Hrishi. Good morning, and welcome, everyone, to Natco's conference call discussing our earnings results for the fourth quarter of FY '24 and the full year results, which ended March 31, 2024. Our discussion during this call will include certain forward-looking statements, which are predictions, projections or estimates about future events. While these forward-looking statements exemplify our judgment and future expectations, please note that these estimates involve several risks and uncertainties that could cause our actual results to differ materially from what is expressed or implied. Natco Pharma undertakes no obligation to publicly revise any forward-looking statements to reflect in future events or circumstances. I'd like to state that except for the participant question, the property of Natco, cannot be recorded or rebroadcasted without Natco's express written permission. Okay. Now let's start with the earnings details. We hope you received our financials and press release. Also, the investor presentation was updated earlier today. These are also available on our website. So the company has recorded its highest ever consolidated revenue and profits during this financial year. This is a result of decades of our diligence and focused strategy on niche high potential molecules. So for the full year, FY '24, Natco has recorded consolidated total revenue of INR 4,126.9 crores as against INR 2,811.7 crores for the last year. This is reflecting roughly about 47% growth. The net profit for the period on a consolidated basis was INR 1,388.3 crores as against INR 715.3 crores prior year, showing a growth of almost 94%. Our business on the domestic front had a onetime charge of roughly INR 90 crores, the details of which was communicated during our press release. We will discuss further during the call. Our revenue split as well has been disclosed during our press release. So with that, I will pause here, we'll take questions. Thank you.

[Operator Instructions] The first question is from the line of Viraj Mahadevia from MoneyGrow India.

Congratulations Rajeev, Rajesh and the entire team at Natco for the excellent results and for proving the naysayers wrong. Given that you have delivered INR 380 crore PAT in Q4 after the exceptional cost of INR 90 crores, can we assume given Revlimid ramp-up underway, INR 400 crore PAT per quarter is sustainable for the next 1 to 2 years?

It depends on -- I don't want to say...

I mean within a 5% tolerance on either side. Is it in that ballpark?

I will not give you like the quarterly updates like that. But what I can say is like this, okay, this year, we did about INR 1,388 crores profit. I think going forward next year, we at least see, if all goes well and there are not too many surprises, I think we should do greater than 20% growth for the year.

Perfect. That's exactly what I was looking for. If that is the case, the stock trades on FY '25 ex-cash at 10x PE per my calculations, very cheap by any standards, given your INR 1,000 crore cash on books and incremental...

No, it's not INR 1,000 crores. Actually, we had some tax payments and some vendor payments to make. But actual cash flow is actually INR 2,000 crores, yes, net. As of May 26, we have INR 2,004 crores cash and investable liquid assets and INR 116 crores of debt.

So approximately INR 2,000 crores of cash and an incremental INR 3,000 crores of free cash flow per my calcs in the next 2 years, so even with an acquisition plan, which you have suggested in the past, are the promoters and Board not considering a buyback?

Well, I think -- I'm thinking about it, I've not made up of my mind. I think if we get a large enough acquisition then I don't want to do a buyback. But if we are unable to close a large acquisition, then maybe we can consider a buyback. I've not made up of my mind as of today. I think we will decide as the year unfolds, yes. But I think that's the thinking.

Understood. Do give it some thought. Promoter group obviously is at 49-odd percent. So even a small buyback would add a lot of confidence in...

We'll do what is right for the company. Yes, certainly.

The next question is from the line of Siddhant Singh from Green Portfolio.

Sir, I wanted to know about your investment in Cellogen. We are very optimistic about the development and all. But how you are planning to leverage this collaboration? And what is the time frame you are expecting that it will get completed and how it will impact our financials?

See, CAR-T therapy is something that we don't have a skill set in-house in Natco. As you know, we are strong in oncology, but we don't do biologics and neither are we doing the newer therapies like CAR-T. And I feel biologics, anyway, we have not participated in that. So I feel the newer technology like, CAR-T, I don't want to miss. I think if you don't have a skill set in-house and you're going to invest in a company, which has the skill set, so I think that's why we've done it. We feel that a lot of the oncology therapy is going to go to CAR-T. So it's a modest start. I think we have the option to invest more, depending on how things go, but it's a modest start. So let's see how things go. It's very early stage. I can't get you time lines and all, but I think we're excited and I think we see that there are a lot of opportunities in this area.

Okay. Sir, as also previous analyst also asked about the acquisitions that you will do in future if you will get a chance. Like, sir, is there any specific geographic areas or any product line which you are focusing on or looking to explore in the future?

I think I said this in the past as well. I think the acquisition space is to build a strong -- strengthen our base business. So we have the money to do it. And primarily, we're looking at an RoW business. So we're looking at different options. As of now, we're not able to close anything, but we're hoping in the next couple of years, we're able to find something that will give us a strong base. So to answer your question, yes, we are looking at an acquisition and in the RoW base. I think that's what we are looking at.

Okay. And last question is about how do you see the top line for FY '25 and EBITDA margin like what we can expect, like previously, what you told us you did it, so what we can expect for FY '25?

I think we believe that we shall be able to grow top line wise also more than 15% to 20% and even on earnings growth, also, we're looking at about 20% comfortably, we think based on certain assumptions and price erosion assumptions, but yes, I think, again, we'll know, but I'm optimistic that I think we're able to hold this.

The next question is from the line of Nirali Shah from Ashika Stock Broking.

Congratulations on the strong set of numbers. My first question is regarding Revlimid. So in the previous earnings call, you did mention that with year 3 beginning from March 2024, we will have a new allocation for Revlimid and noting that exports are driving growth, could you provide some insight on the contribution of Revlimid to overall sales for 4Q? And also how should we look at it in financial year '25 as well. So do we anticipate any significant boost to revenue from this in the upcoming years?

Again, we can't predict the future of what the trajectory of pricing is. But overall, I think Revlimid is obviously a good portion of our earnings this quarter. Overall, our RoW business has also done well. Brazil has done extremely well. Canada has done well. Brazil, I think direct exports and our subsidiary exports are almost 25 million to 26 million a year. Canadian sub has well done nearly CAD 40 million. So I think overall, our RoW business is doing well. I think this year we're expanding into -- we have some very good orders from Egypt and Saudi. So I think we're working very hard to diversify our RoW business and I think the endeavor has gone well. In terms of split and all, we don't do for strategic reasons. But I think I've answered your question. I think a good portion of it is coming from Revlimid. And so I think this year, I think we have -- based on the orders that we have and overall business prospects, I think we've given a guidance. I think that covers your question. Thank you.

Yes, sir. And my second question is about the agri business. Sir, as far as I understand the second half of the year is typically a little bit weak compared to the first half. Then how should we view this segment for the first half of FY '25? Any guidance would be helpful.

I think we wanted to do about INR 140 crores to INR 150 crores, I think that was our estimation, but I think we fell short and -- by about INR 25 crores, INR 30 crores. We believe that there's -- monsoon was bad last year and we had some returns and we had to make a call, do we take the returns and go forward or just carry the stock? So we just thought that at present it would be prudent to just take a hit and clean it up and go forward. Overall, I think it's a good business. We're happy with -- we build a reasonably brand business in a very short duration of time. And in terms of guidance and all, I'll let you know, I think maybe around June quarter, I think we can give you a specific guidance of how the business is going. I think our internal estimation is that we should do well. I think we should have very good growth. Again, very specifically, I'll tell you, I think, in June where we see things are going. So -- and this is -- truly, this is our first true year of operations. So this is our second true year of operations. So I think we'll have a better idea of how things are. I think a lot of it is contingent on we have some new launches we are planning. So I think once we have clarity on that, I think I can give you a better guidance. But we're very optimistic with a lot of the first-time generics that we're trying to launch in the agro business. And I think the business in over a period of time should do very well.

The next question is from the line of Hrishit Jhaveri from Pi Square Investments.

Congratulations for the great set of numbers and meeting the guidance which you provided. I just wanted to understand with so much cash in hand, do we have any significant CapEx plan this year?

It's nothing large. I mean we'd expect that we should spend about, I would believe, INR 300 crores to INR 350 crores a year is what we are spending in a year. I think more or less, we'll spend that just for maintenance CapEx to make sure that what we're making and just -- and sometimes we just start to add a few things just to maintain and build orders that you have. We're not building any new sites. But in the existing site itself, we are expanding capacity. I think that's more or less what we're doing at this time.

Okay. Understood. And sir, I just wanted to have a brief about how is the demand shaping up for the export customers, like all these geopolitical crisis, Red Sea crisis, has that affected Natco or not?

Not so much because our model is very different compared to everyone else. I don't do commodities. I don't do volume products. Our whole model is only doing niche. And a lot of our shipments are by air. And compared to the value and the air freight component is not a significant portion of the costing. So -- it does affect, of course, I mean, if costing -- logistics cost has gone up, but it doesn't have the level of impact that it may have on someone who does more volume products. So yes, there is impact, but nothing dramatic.

The next question is from the line of Rohit from ithought PMS.

Congratulations on really good numbers. So 2 questions, sir. One was anything that you would like to share on the NCE that you have? That was my first question.

Okay. Let me answer your question. So we have 1 NCE, which is we're doing Phase II in the U.S. at this time. And it's early days, so I think I'll refrain from giving any guidances or any idea. So we are doing Phase II. I think it's there -- it's available -- this information is available in the public domain. It's early stage. So I think -- and we're targeting, I think, type of oral cancer specifically. So we'll see how things go. I think it's early days. At this time, I don't want to comment.

Sure. The other 2 questions I had were, one is -- so you said 20% growth, this is on the base of excluding the exceptional or on the reported numbers? That was one. And then I have one more question after this.

I didn't get. Can you rephrase that question. Please repeat it?

Okay. So I was saying, so you reported INR 1,388 crores of profit this year, and you said 20% growth on this, but we also have like one-off of around INR 90 crores. So I mean one should adjust the one-off and look at the adjustments or the reported number is what I wanted to ask? That was my first question, and I have one more after this.

One-offs, that's a very -- you asked a very tricky question. I will give you a straight answer. See, one-offs happen in any business. I mean, so you have a different one-off in a different year. So INR 1,388 crores assumes the one-off. I mean, but -- next year, I mean, in my mind, I'm starting with a clean slate and hopefully I will not generate another one-off, but if -- anything can happen, right? So we always budget for that. So you can't really -- if you make one bad inventory decision, you'll have one bad currency risk. So I mean, there are so many moving parts, so it's very tough to judge. My assumption is INR 1,388 crores assumes whatever else happened and 20% growth assumes everything and -- so we can only make a projection, so on.

Sure. Understood. And my last question is, I mean, so next year or I mean, next financial year is when Revlimid goes off patent and we could see a substantial decline in earning. So I mean, how are you thinking about -- I know this question has been asked many times and we are now very close to that date. So how does -- I mean, how does the management think about the business? We have a pipeline, I agree, but just from, let's say, FY '27 onwards, how do you think building that base which is going to be a big gap to fill, so if you can share some thoughts?

Again, see, that challenge everybody faces. I think we all have very good products and once the decline -- I mean, we had this in history. If you look at Natco's history, we always had these big products. Glatiramer used to do extremely well, now it's declined a bit. Tamiflu used to do extremely well and then over a period of time it declined. So I mean, we just have to keep finding something new. That's the challenge that I face and everybody faces. And I think in a market like our business and pharmaceutical business where everybody is well financially geared, there's very little money that you could make in a product where there are multiple suppliers. So we can only make money in the niches. Now I think I've said this many times, I'll repeat it one more time: unless you get niches right, you can't have earnings growth. And I think I've been saying this and I'll say it again. What do we have to replace it? I mean, I have definitely Semaglutide. We have -- I've said we have FTF on that product. So on certain strengths, we have FTF and on Wegovy also have FTF. So -- and certain strengths we have sole FTF. So I mean, that's probably one big idea. Then we have other first-to-files like Yondelis, Trabectedin. We have, let's see, Olaparib. I mean we all have to see how these things work out. But the trick is that you have about 3 or 4 of these. And in the next 2 years, you build another 2 or 3 ideas, then you have about 6 or 7 ideas and hopefully, we'll able to generate consistently something every year. You'll have 1 or 2 years where you'll have a bit of gap. But you got to accept it. I mean you just can't fight it. You just have to keep building the pipeline and then hopefully you'll be able to do an acquisition, which strengthens your base business and that's how you have to look at it. There is no other way.

The next question is from the line of [ Ameya ] from JM Financial.

Congratulation to Rajeev on good set of numbers this quarter. The first question I have on the division, which we are talking about. First, why RoW market? What is your thought purpose there? And will it be a front-end acquisition or you want to do some acquisition related to technology, which could help you to maybe build your R&D, but if you can give some clarity on the thought process of the EM?

I think emerging markets are very interesting. They're very consistent. They're a lot like domestic. I mean, they have local brands and you have a sustainable business. And you have a distribution arm, which is consistent and large and gives you stability in earnings. And I think I'm -- again, I have my own views on this. I personally believe this is the market to go to. It will give you more broad-based earnings and consistent earnings. And I think acquisitions in India are very expensive. I don't think they will give you the return on capital that you deserve and I think you need to go out. And regulated markets, we're already fairly saturated in that business, and we have fairly strong presence in it. So I think the only gap is the rest of the emerging markets. And this is the way to go and I believe that this is the way forward. And this is how I see in terms of acquisitions will be in area where valuations have not run away compared to our home market.

So should we expect you consolidating your presence in existing RoW or we would see a new market coming up?

Anything is open. I mean we look at different aspects all the time. I mean unless you close something you can't really stay at a particular position like who just asked me. But we're looking at things. I mean, again, I don't have an answer to your question, but I think you asked me what I'm going to do with the money? So this is what I feel we should do with the money, and I'm giving you my reasons for it.

Sure. And the next question I have is on the filings. Last quarter, we had said that there would be interesting filings over the next few months. Have they been already done or we are still in the process for filing these projects? And will those be a near-term opportunity post Revlimid or would we be part of?

I mean, we're looking to file a few products this year. Hopefully, we're able to pull off a couple of FTFs. Again, I don't have any news for you. I mean, we filed one recently. We filed a product called Rimegepant for migraine. But it was like, I think, 7 or 8 filers on day 1. So it kind of takes away the charm. So -- I mean, you have to see -- I mean, unless you file and look at the position -- your patent position, number of filers who have filed on that day, you can't tell whether you have a unique position. So we'll keep trying, as I said a few minutes ago, with the other person who asked me. We just have to keep filing different things, and hopefully, we'll get something right, yes.

Sure. But generally, we do have idea, right, on these? Because the product you talked about is oral solid, ODT basically, largely. So where maybe there could be a possibility of filing, but maybe if the complex injectable is there in the R&D or something like that, I...

No. We have umpteen number of ideas. I think it's not the lack of ideas. It's only about execution. I think if we pull off -- I was just saying, right, if we pull off another 3 ideas in the next 2 years, I think we've done a great job. So then add for your pipeline post '27. So I think that should be the objective. And you just have -- I mean, if you ask me, if I look at my R&D pipeline, I have at least 5, 6 ideas. But by the time you file, you should hope that somebody doesn't file. You should also hope that you will be the first to file. There's so many moving parts, so it's very difficult to judge. See, in this business, you're competing with few played by the molecule. You are probably competing with about 4, 5 guys you have to beat. So it is, in a way, it's easy, right? If you are able to get 4 guys win the race, right? But at the same time, your execution capability, your timing, your science plays a big role. And as I said, if you're able to pull off 2, 3 of these ideas, I think you have done well. So let's hope, yes.

The next question is from the line of Bino from Elara Capital.

Congrats again for a great year. I am just thinking beyond Jan '26 on Revlimid, does the distribution agreement and profit share agreement which you got continued beyond the settlement date of Jan '26 is that pretty much the same term?

I think we have a distribution -- is this a question, do we have a distribution agreement with Teva, which will continue? I think yes, we have an arrangement with Teva that will continue.

And the profit share will be pretty much in same term?

Yes. I mean for the U.S. market. We are working with them in the U.S. market.

The next question is from the line of Tarang Agrawal from Old Bridge AMS.

Just 1 question. Two years that Revlimid come through, how is the pricing traversed say from the first time that you launched till say Q4 of FY '24? And in the short term, in the next 20, 21 months, do you have a view on the stability of pricing?

I can't answer that question, my friend. I can't answer that question. It's strategic. I can't.

Okay. Maybe not the future-looking, but how was it traversed in the last 2 years?

It goes by the market dynamics. That's the answer I can give you.

The next question is from the line of Nikhil from SiMPL.

Yes. Congratulations on good set of numbers. Three questions. One is if you look at Revlimid, we had this Canada launch based on the tender. If you have to draw parallels between what we -- how the Canada market behave for Revlimid and how U.S., would there be any parallels which can be drawn in terms of how much pricing or would you say it would be completely different? Because it's a REMS product, so the whole idea was that the pricing erosion once it goes up, it may not be the way most molecules happen. So are there any parallels, which can be drawn between Canada and U.S.?

See, you know that we don't market the products in the U.S. Teva decides the strategy and Teva decides the pricing. So -- and every market is very unique. You can't draw parallels between any. Canada is a completely different market. I mean, how the product is distributed and how the tender cycles work. So to answer your question, no, you can't draw parallels, it's a different world, 2 different countries, 2 different markets, 2 different strategies, 2 different -- and different marketing partners. So you can't -- nothing is comparable, honestly. Every market is unique in their own way.

Okay. Second question was on Crop Sciences business. So we had a couple of products on pherom based, and there were more on the pipeline and even CTPR combinations and all now, 1 year down the line, we've done the launch, what could be -- what do you think could be changes which we need to bring into our execution? And one of the reasons for going into Crop Sciences was the idea was that this will provide some stability to the base business and can be a scalable and very profitable. So are there any changes to that assumption from where you began and today, how you see the business?