I am pretty new to investing in pharma stocks and it attracted my attention only due to their recent lackluster performance compared to the broader markets. The analysis on this thread is very educating. But, I was wondering if there are certain questions on which a more educated guess can be made that may help with decision making.
For example it is widely reported that the current unit under inspection contributes 20% of U.S. revenue for the firm. Given that some APIs are exempted for now, and since in at least one of them the company is a market leader (as far as i can make out). The direct revenue impact may be less than 20% (say 15%, unfortunately I couldn't find API wise revenue contribution numbers anywhere). But I guess base case scenario assuming a minimum of 15% fall in revenue solely due to actions on this facility is reasonable..
In terms of cascading effect is it possible for someone to shed light on how often such an action leads to
a. Other facilities of the company brought under inspection (considering some of the comments from FDA in the 483 point to company officials being already aware of the issues with respect to quality). I believe this the original 483 from the FDA website: https://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatoryInformation/CDERFOIAElectronicReadingRoom/UCM534816.pdf. Considering the nature of these findings, if other facilities are not brought into inspection that may in itself be a positive development as their might not be further dampening of revenue. But if that is not the case revenues may face further fall
b.How often has it been seen in the past that such a case leads to other regulators (say EU/ U.K) waking up to carry out their own inspections as well which may result in further fall in revenues.
c.How does the FDA action affect the company's ability to bring out new products. If there is no sustainable damage to its ability due to this particular case then the growth from these products may provide some cushion to the company in the next 2-3 years (I am assuming that is the best case scenario for this issue to be resolved as of now).
Around its peak price around Aug '2016 markets were pricing 20-25% growth. The company last traded at its current price of 610 around june 14. That is 642 sales in jun '14 v/s dec '16 quarter sales of 976.50 and 167.93 june net profit v/s dec net profit of 268.32. That is about 35-40% de-growth in numbers.
So essentially in June 14 the price of around 600 was pricing in those numbers + 20% growth
So the question is what is today's price pricing in?
a. better numbers than the ones in june 14 + further de-growth or
b. same numbers as in june 14 + flat or lower growth.
Either way it seems the current price may be factoring in a fall of more than 15-20% in revenues/ profits (closer to 30-40% or more). If the prices fall further it would be factoring an even bigger de-growth and/or longer recovery period.This is of course not accurate but only a rough gauge of value being assigned by the market.I have not mentioned other scenarios because they would be more optimistic and will only indicate that at the current price the stock is undervalued.
I personally feel in current scenario, analysis of past financial numbers is incomplete without considering these more qualitative factors. But the ultimate question to answer is this: Is it possible that the company will face a scenario of say 60-70% de-growth due to cascading effect of these factors. As that would mean significantly lower prices than the current price. But if that is unlikely then it could be a value buy.
Personally considering these factors and taking into account my analysis as per elliott wave theory on the long term charts below. I have zeroed in on how to play this for my portfolio.
If this labeling here is correct the price of 482 shouldn't be violated. Wave 4 is an expanded flat correction and the fall from August 2016 peak is part of the C wave (within wave 4). This fall has a five wave structure which seems to be working in a 5th wave. The prices are also approaching a crucial long term trend line. Although it remains to be seen if it holds. I would probably look to enter if the prices bounce off after testing the trendline and will have a stop loss of 482 (20-25% risk).
If the prices in fact head to 482. It would actually signify markets pricing in a bigger de-growth and either new adverse news would have hit the counter already or may be on the way. In which case I believe the company will likely be grappling with these issues for a couple of years and the stock may go into a slumber for some time.
If however the prices manage to go over 711 (March 21 high), either substantial time would have passed (which would mean probability of some of the cascading effects materializing would have subsided) or we may see some +ve news hitting the counter (or on the way). Either way I would probably add to the position as we get more clarity on some of these points.
This is probably the only way I could see myself playing this contrarian call.
Disc: No investment as of now. Likely to enter as described.