One aspect that has always perplexed me, whenever I gazed at the magnificent portfolios of eminent Gurus like Radhakishan Damani, Ramesh Damani, Dolly Khanna, Vijay Kedia, Ashish Kacholia, Vijay Kumar Goel, Prof Sanjay Bakshi etc, is why they have studiously avoided investing in Pharma stocks.
I noted that this could not be a coincidence but that the Gurus are implementing a carefully thought-out strategy to stay away from the Pharma sector.
How is it that a sector in which all and sundry are investing without a care in the World and which is spouting so many multibaggers is being shunned by the Gurus was my naive question.
Today, the wisdom of the Gurus became clear as one Pharma stock after the other crashed to a new low.
Marquee names like Lupin, Sun Pharma, Natco Pharma, Alembic Pharma, Ajanta Pharma, etc lost large chunks of their valuation. In fact, the Nifty Pharma Index sunk to a 15-month low after losing 16% in just the last six months.
Understandably, investors who have entrusted their life savings to these stocks are distraught at the colossal losses.
There are two reasons for the savage losses suffered by the Pharma sector.
The first is that NAMO’s drug regulator, Central Drugs Standard Control Organisation (CDSCO), suddenly banned 344 drugs. This includes popular drugs such as “Vicks Action 500” made by Proctor & Gamble and “Corex Cough Syrup” made by Pfizer. The reasons given for the ban is that the drugs are “harmful” and/ or have “no therapeutic justification”.
The second reason is that the US FDA is spearheading a crackdown on Indian Pharma companies. Several well known companies such as Dr. Reddy’s, Cadila Pharma, Lupin and Natco have received warning letters that there are defects in their manufacturing processes and may be derecognized. There are rumours that more such letters are in the pipeline.
Surprisingly, while the drug companies are outraged at the allegedly arbitrary action by NAMO’s department, some experts welcomed the move and called it “long due”.
Surajit Pal, an expert on Pharma stocks, was in favour of the ban. “Typically, around 60-70% of combination drugs in the industry do not hold any logic. Many of them are produced for purely commercial purposes, irrespective of what their health impacts are. These practices should be stopped” he fumed.
Kiran Mazumdar Shaw, the outspoken boss-woman of Biocon also supported NAMO’s move:
Ensuring uniform drug mfg quality standards countrywide a step forward in restoring faith in India’s pharma prowesshttps://t.co/l2KlaW8PUI
— Kiran Mazumdar Shaw (@kiranshaw) March 29, 2016
Meanwhile, all experts are unanimous that the crackdown by NAMO and the FDA spells doom for the Pharma sector.
Deven Choksey, a renowned expert, warned that “the overhang of the situation will definitely take a toll on the stocks for sure and the investor sentiment will continue to remain low till there is more clarity from the government”. It was also explained that a drop in domestic revenues coupled with bleak export growth and sky-high valuations means that Pharma companies will go out of favour.
Sandip Sabharwal called the entire Pharma sector “uninvestable”. He lamented on the sorry state of affairs with a pithy tweet:
It is crazy how each and every pharma company is falling short of USFDA standards.
Sector has become uninvestable.— sandip sabharwal (@sandipsabharwal) March 29, 2016
Samir Arora also expressed his concern at the state of affairs with his typical dry wit:
Indian Pharma Companies are experiencing serious side effects on strong medicine given by US FDA
— Samir Arora (@Iamsamirarora) March 29, 2016
However, some Gurus are preferring discretion over valour. Basant Maheshwari is notably silent and is keeping a low profile. It may be recalled that he once nurtured a fear of the Pharma sector and he expounded the reasons for that in his best seller “The Thoughtful Investor”. However, thereafter, Basant underwent a remarkable transformation. He not only overcame his phobia for Pharma stocks but became a champion for them, recommending as many as three stocks for investment. We have to wait for some commentary from Basant on what beleaguered investors should do now.
Meanwhile, novice investors like you and me are in a bad shape because another one of our favourite sectors has gone out of favour. It may be recalled that the banking and NBFC sector has already been declared to be out of bounds for us by the dictates of Ramesh Damani and Prof Sanjay Bakshi due to the unending NPAs. Now, with the Pharma sector also going out of bounds, the question is whether there is any safe haven where we can invest our already meager savings and preserve some money for our dotage?
Many years back Damani got the Natco pharma liking and it become a multi beggar.Not sure of his position now. RJ had Lupin and Aurobindo…not sure about that too.
Yes I was about to comment that Lupin has been RJ’s favorite stock. I am really not sure how anybody can write that pharma sector should be avoided. However USFDA issues are definitely proving to be of concern. Also I guess better disclosures are needed from some of these companies.
People who follow me knows how i try to be away from Pharma. Its a sector with too many risks outside the domain of operation. However i feel as pharma as a sector reaches the stage of extreme pessimism…thats when one needs to pounce on it. After all, diseases are here to stay and so is pharma.
Fine article. I was looking for such articles. I will be grateful if someone can throw light on such issues.
Can one make money WITHOUT investing in pharma stocks. (SAY 25-30 % CAGR over 10 yrs)
I find it very difficult to understand the sector as a whole.
THANKS
USFDA observations and alerts will make these compnies real world class in manufacturing.This will prove to be short term pain for long term gain.More over this situation will keep away many Pharma compnies of others countries away from US market,a big potential gain.Any action taken by these compnies for qualty compliance will strenghten the company.
In the 5 to 7 years, most of the pharma stocks were moved up 10 X to 200 X . During this period, no other sector given this much of returns. so naturally after a very big rally ,some meaningful price and time correction going to come, that is what happening now. (your mentioned 4 or 6 gurus not invested and not reaped the benefit means it was their wisdom or ignorance )
Looking at it differently: Is there any reason to believe that the USFDA is acting on just merits ? OR is the US Pharma Industry Lobby using it as a tool to malign Indian Pharma companies & thereby, reduce the usage of Indian Generics in the USA, so that the US Pharma cos. can flourish at their cost.
This is a good question, was in my mind too. I always wondered if US FDA is a tool in the hands of cronies in the US (lobby close to govt) that will not let other countries prosper at their own peril. I always saw for example the US Federal Reserve being close to the large MNC banks and making its policies to benefit them directly (and benefit the govt officials indirectly) – for example the policy of bringing unwanted liquidity and lending it to the banking sector in the name of its revival, and keeping interest rates near zero.
Also, if someone can investigate whether the FDA would approve new drugs researched/invented/patented by Indian companies in an unbiased manner? Currently some of them are under different stages of trial in the US.
Finally, can Modi therefore set up a top quality FD approval body in India that can become a world standard? (he needs to keep politics out of it, though)
This is interesting! Where do you check the portfolios of these gurus, can you tell me the source? This same portal many times in the past had said that a few of these Gurus own pharmas like RJ holds Lupin, he also accumulated Auro pharma in a big way etc.