E. Kumar Sharma August 19, 2009
When Chowdary V. Nannapaneni came back from the US in 1981 with plans to get into pharma manufacturing after stints at companies there, naming his firm was the easy part. He just patched together the family names of Nannapaneni, Alapati and Tummala to Natco.
Securing a loan of Rs 20 lakh and adding Rs 12 lakh of his own funds, the 36-year-old MS in Pharmacy then set off on his route to growth, taking Natco to a peak in 1997 (net profit of Rs 16 crore on revenues of Rs 279 crore). The dizzying drop in just two years into a net loss of Rs 22 crore was his first lesson in focus.
“A lot of our investments then (like the one in a softgel plant in the US) went bad,” says Founder Chairman Chowdary V. Nannapaneni. His son, Rajeev Nannapaneni, who took over as CEO in 2005, recalls: “At that time we took some gambles... We gambled on the chemicals business (bulk drugs) and we also did a lot of commoditised products. The product mix was wrong and we grew too fast.” Almost bankrupted and deep in debt, Natco was forced to restructure and sell its brands.
Today, Natco is comfortably back in the black after focussing on a niche (in 2008-09, Rs 97 crore of its revenues of Rs 458 crore came just from the oncology business in India), and going the partnership way to expand markets. A June 2008 deal with a US major for global marketing was followed up in April this year with similar no-hassles-for-me deals with Lupin and Dr Reddy’s Laboratories.
Focus and Seek Partners
The Chairman recalls that in late 2002, when Natco was seeking niches, there was a lot of literature around on novel anti-cancer drugs like Gleevec, and his people came up with the idea of making these at affordable prices. According to Rajeev Nannapaneni, the Indian market for cancer drugs was Rs 250-300 crore then. Today, it is Rs 1,000 crore. Veenat’s success decided Natco’s course. “Veenat was our first oncology product and since then we have been seriously growing our presence in this space,” says the Chairman. Natco has 21 oncology products today.
“We have always had good chemistry skills (including in peptides and formulations) but it is just that we have decided to use those skills only in niches rather than on commodity products,” says the 6’6” tall Rajeev Nannapaneni.
He says Natco skills have attracted partnerships from some of the bestknown pharma companies: while the partner gets to expand its portfolio, Natco gains by letting it take care of marketing, fighting legal battles abroad, and from royalties and profit sharing.
“They have some good strengths in oncology,” says G. V. Prasad, Vicechairman and CEO of Dr Reddy’s.
The Patent Challenge
Says Rajeev Nannapaneni: “The only way you can offset the slowdown in India is by growing the restof-the-world business because, globally, oncology is #2 after cardiology.” So, it is investing a total of around Rs 100 crore on a facility each in Andhra Pradesh and Tamil Nadu.
It is also leveraging its pipeline for patent challenges that could be firstto-file opportunities.
The Chairman says the focus is on research and development, for which Natco has a 200-strong team. Spending 4-5 per cent of revenues on R&D, it is also looking at new chemical entities. It has begun Phase 1 trials for one of the few compounds it has developed, codenamed NRC 19, effective for multiple indications.
“Since it is for a life-saving drug. It is under the fast-track approval model and my hope is to hit the market in the next couple of years,” he says.
Eggs and Baskets
Notes Dr Y. K. Hamied, Chairman and Managing Director of Cipla, a champion of affordable generics, who had created a global controversy in 2001 by offering AIDS drugs at a fraction of their Western costs: “A multiproduct approach is always the best… The singular reason for Cipla’s success has been its wide basket of products.”
However, he says, the newer drugs are biotech-based, and companies like Cipla who are big players in oncology will have to focus on this increasingly now. Rajeev Nannapaneni knows that biotech-based drugs are the future, but they involve huge capital expenditure.
Others worry about Natco’s ownership structure and asset acquisitions. Natco is dominated by the promoter, who with friends and family controls up to 65 per cent. Then, in 2006 and 2007, Natco acquired US retail pharmacy outlets, which analysts say are unrelated business. Three, Natco has built a land bank of close to 400 acres including those of its plants, near the new international airport in Hyderabad.
But Chairman Nannapaneni sees no problems with the high promoter holding. Instead, to him it is an advantage, as he can take calculated risks. As for the US pharmacy chain, he said Natco did it to understand the US market and that it has recovered most of its investments.
For Rajeev Nannapaneni, the land bank gives a comfort level. For the Chairman, however, the land bank may actually be required for more plants and a research facility.
As for the future, there are indications even the global majors could be looking at generics as governments try to widen health care with cheaper drugs.
How will Natco deal with this? “By having a hybrid model, focussing on technology platforms and global alliances that spread the risks geographically,” says Rajeev Nannapaneni.
And as P. Bhaskara Narayana, Natco’s Director & Chief Financial Officer, says: “One of the strategies is to aim for products whose patents are up for challenge and finding a partner ready to bear the cost of filing ANDAs (Abbreviated New Drug Applications) in the US as well as that of litigation.”