Some people who give sporadic investment unaccountable advice are saying “you should have sold pharma long ago”. Great advice in an industry where “Hindsight has 20/20 vision”.

Let us say you have Cipla, Lupin and Sun at various prices – and these prices are near their all time high!

What are you supposed to do now?

  • Commit suicide?
  • Average every week by buying more shares?
  • Panic and sell off all shares?
  • Look for new pharma shares to buy?

Let us look at the pharma industry’s GLOBAL problems first:

  • Global pharma industry growth is moderating, and will slow down in 2017, and this is bound to impact all pharma companies
  • US pharma industry will slow down dramatically and those companies dependent on US markets will suffer a lot more
  • Healthcare policy is supposedly a top priority for the new Presidential administration, and how it will play out in 2017 will be a key issue for the pharmaceutical industry. Jury is still out on this.
  • All pharma companies will see a drop in earnings – thanks to a fall in exports.
  • FDA will play a crucial role in reducing sales of India based manufacturers
  • In January 2017, the US Supreme Court agreed to review a case, a dispute involving Amgen and Novartis’ Sandoz, regarding the interpretation of notification requirements under the Biologics Price Competition and Innovation Act of 2009 (BPCIA), which set the US regulatory pathway for biosimilars. This is likely to create drop in margins for many players.
  • FDA – there will be a big drop in new issue approvals.
  • The amount of Venture capital flowing into the pharma industry has been good, but existing companies will have profit pressures
  • patients will increasingly become a strategic partner for pharmaceutical companies – and they may decide what medicines to buy and where to buy!
  • ‘Value Based Systems’ – will be in place too and that will have an impact
  • Impact of more venture funding and new technologies in countries like India, Indonesia, China,…will impact margins too!

So after all this global gyan, the growth in India will also impact the EPS – but that is not likely to impact much.

The thing to ask is:

  • will all this impact be for a year or 2 or more?
  • do these companies have managerial strength to come out of these problems?
  • will these companies be able to find other lucrative markets for other drugs or similar drugs?
  • will growth in Indian markets make up for the fall in the US market?

No, these are not easy to answer.

I can tell you what I am going to do. I own Gsk, Biocon, Pfizer, Sun, Lupin, Cipla, …and a couple of other shares in my portfolio. Some of the Sun bought even at 700+, but lots bought at prices lower than 400. Will I be selling the shares now? No. I did trade at higher prices, but will not be selling now.

Will I be buying pharma shares now? No. You buy a share because the price is expected to go up, NOT BECAUSE IT WILL NOT FALL DOWN FURTHER. At the current juncture the pharma industry is SURELY not a good buy, but at best a contrarian buy. In fact it could be a value trap – but it does not even look like a value buy. The PE at which these shares are available and the dividend yield of these shares is very low – not attractive enough at all. However if you have say 1000 Sun Pharma, adding 100 at Rs. 500 may not be a bad idea, but also exit it at 550 and buy back at a lower price. This is called delivery based trading and you cannot lose much money.

So you have to decide on what to do. It is a time when sitting tight might be a better option than to average or sell in panic. However, do not take this advice seriously, I might be turning a buyer soon – of if I see more evidence – even buy some puts in the pharma index. I have done this post just as a refresher about what to do when an industry itself is not doing well.

The software industry too looks gloomy, but I am an active trader in Mindtree, Infosys, etc. and an investor in TCS, Infy, Wipro and Mindtree. No, I am not adding here too, but nor am I selling in panic either!

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