In my previous stint at Citigroup Venture Capital (CVC), we had done fairly well investing in the pharmaceutical industry. We invested in Lupin Pharmaceuticals and Jubilant Life Sciences and both delivered healthy returns of 9x and 3x respectively.
So in 2010, we were again scouting for a generic pharma company. The stories around the larger companies were already well documented and priced in, but we felt there was still some value-unlocking left in the mid-cap pharma space, where we began to hunt. By that time, new drug pipelines were slowing down, so it was also clear to us that only companies that had differentiated portfolios could offer a good potential. In short, we were looking at three things — a mid-market pharma company, differentiated strategy with respect to products, and a business with a stable base.
We had first heard of Natco from Lupin, which had partnered with it on some generic launches in the US. Natco was founded around the same time as Dr Reddy’s. In the mid-90s, Natco’s balance sheet was stretched because of diversification into infrastructure, which they subsequently exited. But the lost time meant it was a smaller company than Dr Reddy’s (a turnover of Rs.457 crore in 2010, compared to Rs.7,028 crore for Dr Reddy’s). But now, it was a lot more focused. It came across to us as an interesting company with chemistry capabilities far beyond its size.
We did a lot of research on the company and its promoters VC Nannapaneni and Rajeev Nannapaneni. Natco was the number one domestic player in the over Rs.1,000 crore oncology market. Rajeev’s logic about being focused on oncology was sound. Though cancer care is expensive in India, it does not require a large sales force, which makes it an inherently high-margin business. Natco was easily reaching out to 1,700 cancer specialists in India with a sales force of just 200.
Natco’s strength was in chemistry. That’s what they stuck to, especially in the US market. They partnered with the likes of Mylan and Alvogen to launch products. These arrangements allowed Natco to focus on p