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?