I have been getting a lot of queries and private messages about pharma space. I feel that in itself might indicate that sector may not have bottomed out. 
Broadly the pharma space is divided into companies which predominantly get their revenues from US and other export markets (and lesser part of total revenues from domestic markets ) . All the large companies fit into this category. Sun, Lupin, Aurobindo, Glenmark, Alembic, etc. Then there are some companies which get almost equal revenues from domestic and export markets. JB Chem fits into this category. Among others maybe Torrent and Dr Reddys fit in this category. (not too sure about it but anyone interested should check the presentation of respective companies). And then there are companies which derive a major part of their revenues from domestic markets. All MNC pharma companies fit into this category. Among Indian companies, Alkem (70% domestic revenues), Eris (100% domestic revenues), FDC (Nearly 70-80% domestic revenues) also fit into the latter category. Most of these companies derive their majority of revenues from formulations.
There is another group of companies which manufacture API which are intermediates used to manufacture formulations. (basically N-1 stage) Among these Divis stands out. Others are Solara (demerged arm of Strides), Hikal (part of its business caters to this), Syngene, Laurus (which is also venturing into formulations) etc . These companies have contracts with large domestic and foreign pharma companies to supply the API for formulations. Most of these companies are dependent on orders form other companies and are B to B in nature.
Coming to some specific queries regarding companies in domestic space, my thesis revolves around the kind of price action seen in the MNC pharma companies which predominantly cater to domestic space. Most of these companies have had stupendous rise. Part of it could be due to negligible concerns on promoter quality and part of it due to consistent (though sedate) growth reported by these companies.
The benefit domestic companies have is that they dont suffer from any regulatory risk from USFDA. But they do have a potential risk of their products getting trapped in drug price control. (DPCO) But with more and more patients becoming more affording and taking prompt treatment from doctors and a lot of govt incentivised schemes, the domestic market is witnessing good demand. A lot of these companies have increased their domestic sales force and have gained market share.
As a sector I am not too enthused by the pharma sector but since I am conversant with the sector, I look into pharma companies on a case to case basis and get interested if there is undervaluation or any other major trigger that makes those companies interesting.
Eris as a company has mind blowing margins and caught market fancy post its listing. It has an impressive line up of products and gets its revenues majorly from chronic segment which caters mainly to lifestyle diseases like diabetes, cardiology, vitamins etc. Only problem is I cannot figure out whether the nearly 30% net profit margins are sustainable or not. And how this company can get such stupendous margins while only catering to domestic markets. One of the factors is low tax rates. But even before that, it has very good EBIDTA margins. Question is whether it can maintain these margins and for how long. Stock price has corrected significantly in recent months and that makes it interesting, but need to look more into it. Concall provides a lot of details about the business.
JB Chem was a case of sheer undervaluation and a very conservative management going in for nearly 200 crores of capex and subsequently recruiting a large number of MR, taking its initial count of 800-850 two years back to current 1400 plus. And as luck would have it, it suffered from the much debated ranitidine scare. Now I hear a lot of knowledgable doctor friends pronouncing ranitidine safe and being more worried about recent reports of potential side effects of the PPIs (proton pump inhibitors e.g pantoprazole, rabeprazole etc ) especially in aged patients. It has announced a buy back at a price of 440 per share but quantum of buyback is small. But with improvement in profitability and stellar numbers (with sedate topline growth) in q2 fy 20, the EPS figures appear very attractive.
FDC has reported very good growth figures since past 2 quarters which is unusual for it. But whether this kind of performance continues or not needs to be seen. I have a tracking position in this company based on superb numbers for past 2 qtrs.
I have a lot of friends who feel that pharma as a sector needs to be looked into considering the kind of price erosion seen in the sector but I personally prefer to remain neutral. I like to see companies on a case to case basis;.
Hope this answers a lot of queries I have received in private message and in this therad.
