Pharma Stocks: Time to worry & exit?

It’s been a year since pharma sector has been testing investor’s patience. Nifty Pharma index is down with -9.87% since last 1 year. Return remains dismal even if we extend our horizon to 2 years. This fall has been more severe in case of individual stocks.

As an angry investor, you must be searching for the person who told you that pharma never goes down since people will keep popping medicines. But stocks continue to go down, lets dig out why?

Pharma stocks have seen a number of USFDA observation in their production facility which means they can no longer supply products to US from that facility unless objections are cleared by USFDA. The problem with pharma stocks is that their revenue is heavily dependent of overseas markets (primarily US) & not just Indian market. So while people keep on popping pills but from other providers (in case of US, India revenue is still healthy) and it has caused overall revenue dip.

Is this slump going to continue in future? AI believes, it will not because the industry itself has been undergoing a structural shift and becoming smarter. Pharma companies are investing money to become compliant with USFDA and other international norms. Until a few years back, Indian pharma companies were not great in documentation & process controls. To quote an example, Indoco Remedies was charged by USFDA on deliberate irregularities in record maintenance, another giant was observed using inferior material in injectable drug packaging leading to possible contamination. Such observations are serious in nature and it exposed lack of depth in Indian pharma production facilities.

Now pharma companies are forced to upgrade, automate & digitize their production facilities to avoid any lapses. This will need financial investment and tighter quality controls. Once this transformation takes place, their revenue will again start increasing. India still remains one of the cheapest supplier of generic medicines & this advantage is not going to evaporate overnight.

AI believes, such transformation will take time for pharma giants because of their size & large scale changes. They are a good bet for value investor. However, for small and mid sized pharma companies, it’s little different, they can swiftly adapt to changing market dynamics.

We have one such stock in our MultiCAP Multibagger portfolio. The company is a vertically integrated pharmaceutical manufacturer with focus on high margin API formulation business. Despite ongoing slump in pharma sector, this stock is up 38% since Jan 2017 with further return potential of atleast 33% in near term. Click here to find out more on this.

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