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Weekly Insights #14- An Important Learning from Investing Experience in Pharma Stocks

Over the course of my investing career, I have invested in Pharma sector big time. It has been a sector that I have always liked because of multiple differentiated business models that it offers along with an opportunity for non-linear growth & optionalities.


And I have invested across these varied business models-

CRAMS- Suven Pharma, Syngene

Niche Generics- Natco, Gland

Domestic Pharma- Abbott, Astrazeneca, JB Chemicals

Others- Biocon, Laurus, Piramal Pharma


In some stocks I made;

- very good returns (Suven, Syngene, Laurus, Abbott, Astrazeneca, JB Chemicals)

- no returns (Biocon, Natco)

- big losses (Gland, Piramal Pharma)


Having invested and tracked these businesses even after exiting them, there is one key lesson that I have learned with respect to investing in B2B/Exports pharma businesses.


And this learning is that-


As & when these B2B/Exports pharma businesses starts facing some challenges it is better to exit, because these challenges never get resolved in couple of quarters (which is always the initial expectation) and gets dragged for a long period of time.


And during this period of challenges, it is very easy for these stocks to see 50% drawdowns because profitability surely gets impacted and that has a compounding effect on valuations. Thus, with poor growth + de-rating, the stock gets beaten down.


A lot of this has to do with the fact that external environment plays an extremely large role in how these businesses perform and this external environment is quite dynamic in the sense that it can turn from high favorable to high unfavorable in no time.


The best legacy example of this is of how US focused companies like Sun, Lupin etc have fared. The issues of pricing pressure & regulatory compliance are something that has dragged on since 2015 and still have not resolved.


Some of the recent examples that I have seen play out-


A. Biocon

Troubles for Biocon started in early 2021 when it stated that it will not be able to achieve its guided $1 billion revenue for its Biologics business in FY22. The reason for the same was delay in getting regulatory approvals for new products like Bevacizumab & Aspart.


Fast forward two years, it is still facing challenges in getting approvals for new products. And during this time period, its stock price has been cut in half.


B. Laurus Labs

Initial troubles for Laurus started in Q1FY22 when it saw challenges of high inventory in its ARV API business, something that was expected to get resolved by H2FY22. However, rather than getting resolved, the challenge extended to include even pricing pressure in ARV business; leading to two years of degrowth in this core business.

This led to Laurus missing its earlier guidance of $1 billion revenues in FY23.


On a lighter note- Billion Dollar Guidance is a jinx.


The stock price here has corrected more than 50% since. And if wasn’t for one-off Paxlovid business in FY23, the overall numbers here would be so much worse.


C. Gland Pharma

Troubles for Gland started in Q4FY22 when its US business slowed down due to higher inventory related challenges. This high inventory challenge then expanded to supply related challenges and now to pricing challenges. As a result, the company has seen de-growth in last 3-quarters and expect FY24 to be a flat year.


Stock here is down ~60% during this period.


So, it is always prudent to be extremely risk averse or better to exit when such challenges emerge because they never get resolved so easily and without stock seeing severe drawdowns.


Also, if one is looking to buy into such stocks, it is always better to see 1-2 quarters of turnaround rather than anticipating the same. Max you will end up buying at some higher price, but that is a much better risk:reward outcome than buying something in anticipation of a turnaround wherein if the timing is wrong even for few quarters, you can still see another leg of drawdown from your price.


Due to busy schedule on account of heighten quarterly results activity over coming weeks, we might pause Weekly Insights for next 1-2 weeks and will resume post that with much more interesting & actionable insights.




 

Surge Capital is a trade/brand name used by Ankush Agrawal (Individual SEBI Registered Research Analyst INH000008941) to provide equity research services in the Indian Equity Markets.


“Registration granted by SEBI, and certification from NISM in no way guarantee performance of the Research Analyst or provide any assurance of returns to investors”


“Investments in securities market are subject to market risks. Read all the related documents carefully before investing.”


“The securities quoted are for illustration only and are not recommendatory”



Stock specific investment disclosure:

Suven Pharma- No Investment. Not Traded in last 30 days. Not an active recommendation in Research Service.

Syngene- Invested. Not Traded in last 30 days. Active recommendation in Research Service.

Gland Pharma- No Investment. Not Traded in last 30 days. Not an active recommendation in Research Service.

Piramal Pharma- No Investment. Not Traded in last 30 days. Not an active recommendation in Research Service.

Biocon- No Investment. Not Traded in last 30 days. Not an active recommendation in Research Service.

Natco Pharma- No Investment. Not Traded in last 30 days. Not an active recommendation in Research Service.

JB Chemicals- No Investment. Not Traded in last 30 days. Not an active recommendation in Research Service.

Abbott- No Investment. Not Traded in last 30 days. Not an active recommendation in Research Service.

Astrazeneca- No Investment. Not Traded in last 30 days. Not an active recommendation in Research Service.

Laurus Labs- No Investment. Not Traded in last 30 days. Not an active recommendation in Research Service.

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Fooled by randomness. The COVID challenge and recovery there off makes things challenging for Pharma sector, I guess. Nobody knows whether the turn around is rewarding or penalized in future. So it is a double sword problem. As it is a bitten down sector, we may see some good traction in near future.

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