Pharma

Investing Strategies
1

Think we can add very generic kind of news on sectors in this thread. Request admin to move it to appropriate section if needed.

The news is about the DPCO (Drug Price Control Order).

http://timesofindia.indiatimes.com/business/india-business/Drug-prices-set-to-fall-by-up-to-80/articleshow/20099203.cms

Finally the ball seems to be rolling, and govt. has passed the DPCO. Some important sections reproduced here. Now the moot question is which drug companies are impacted by this and which will not be. Any idea ?

The government on Thursday issued the long-pendingdrug price control order, paving the way for the implementation of national pharmaceutical pricing policy, which will lead to a reduction in prices of medicines on an average by 20-25%, and in some life-saving ones, by up to 80%.

Prices of 652 formulations under 27 therapeutic areas like anti-allergic (cetrizine), cardiac (aten), gastro-intestinal medicines (ocid), pain-killers (paracetamol) and anti-diabetic drugs (insulin) are expected to come down. Others in the list include anti-fungal, anti-tuberculosis, anti-leprosy, anti-hypertensives and cancer drugs. In certain cancer drugs, prices may come down by up to 80%.

Over the next few weeks, drug pricing regulatorNational Pharmaceutical Pricing Authorityis expected to announce in tranches the ceiling prices of 652 formulations, which will serve as the benchmark for companies. The industry will be given 45 days to clear the existing stock, and make the relevant changes in their prices.

The policy uses a market-based pricing method: ‘the simple average method’ for determining the ceiling price of all the molecules (drugs) under a particular therapeutic area with over 1% market share. The price to the consumer will be determined by adding 16% margin (to the retailer) as well as the local taxes to the average price (ceiling price).

Addressing the concern of public health NGOs, the DPCO clarifies that companies will not be able to increase prices, in case the ceiling price fixed by the government, is higher than their price. In cases, where existing manufactures, selling the formulations at a price higher than the ceiling price, will have to revise the prices downward.

Prices of formulations will be frozen for a year, and will be revised in line as per the annual wholesale price index, in April every year.

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Is Unichem going to be affected because of it and are there any escape routes?

Thanks to MR led n inducement based prescription by some Doctors the price differentials for same salt but different brand is very high. I personally experienced for a Ciplox TZ was at 5 times the cost approximately the same salt being offered by FDC.no wonder GOI was forced to take some position.

3

Revenue hit of 4-5% hit is the news.

http://www.livemint.com/Politics/PKQzfGrI8OHVK77ckcQXXM/New-price-regime-to-hurt-drug-industry-revenue-by-45.html

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I think most of these companies will find out ways out of this govt created mess. It does not take too much creative thinking to add a small amount of an additional drug to get out of the DPCO basket.

e.g there was an antibiotic called doxycycline which was priced at around 3-4 rs per tablet/capsule and that came under DPCO and was made to be priced below rs 1. That was practically unviable for most of the players to produce.

So some creative companies added an anti inflammatory molecule called seratio peptidase to the doxycycline drug and started selling it at rs 3-4 again and thus got out of DPCO.

Clinically effectwise and side effectwise both drugs are same but the drug companies showed some creativity and got out of the mess.

That should happen going forward also. All these concerns will be forgotten once the companies keep posting stellar results.

Most recent example is that of titan which fell down to 225 and quickly rebounded to 275-80 levels giving 20% solid returns within no time. All those things about gold prices falling and govt diktats destroying the business have fallen now by the wayside.

Good companies and businesses will always find out ways and means to survive and emerge stronger from these periodic concerns.

1 Like
5

Absolutely right about Titan :slight_smile:

But i had no idea about this finer point of being able to add a molecule to an existing drug, and great to hear your comment on that. Great Learning :slight_smile:

6

I think drugs brought under DPCO is just hype. The method used to arrive at the ceiling price of essential drugs looks hugely flawed. It looks like top 3 selling companies of a particular molecule, will determine the price ceiling for the rest. Big loopholes are left here. I don’t know how this is going to keep drug prices under control .What prevents top selling brands forming a drug cartel to increase price ceiling which makes way for cheaper selling companies to raise price as well. MNC’s with huge pockets can also easily raise number of prescriptions for their brands with huge incentives. How then can we expect them to keep the prices low for other companies.? Why a simple average of just top 3 companies, why not simple average of cheapest prices in the category itself rather than going by ranking ? Iam not too confident this new formula is going to bring downs sales value drastically in the long term. In fact it looks like it might increase existing prices. Hitesh can probably throw more light on the flaws in this new method of price calculation.

7

Guys, agreed that domestic business is a big opportunity for indian pharma companies, but I feel it is not the exciting reason fro investing in indian pharma companies. It is because of their positioning in global scenarios which excite me the most. Let me list down few of the most important things that is happening at the same time.

1> Europe is getting old. And as we know the more older a man get, the more medicine is needed for him.

2> US spends 20% of their GDP in health care. Because of steep cost of medicare in USA, there is a big time discourse going on for affordable health care

3> Huge numbers of block-buster drugs are going off-patent and are expected to be going off-patent in coming year. This shall effect indian companies in 2 ways

3.a> Indian generics players like Ranbaxy get an opportunity to sell generics in US and get benefited.

3.b> US pharma companies will feel the pressure of reduced margin and profitability, result: a forced transition towards relying on pharma outsourcing aka CRAMS, and or shifting R&D/Manufacturing to cheapre places like India. So the benefit will goto CRAMS/API player like Divis/Granules/Aarti drugs/Omkar speciality.

4). The scope of moving in value chain. Eventually some of indian companies will move up in value chain and start competing with global pharma biggies in finding new molecules and patenting them - aka Glenmark

5> India’s excellent chemistry skills are an often ignored fact. Indias pharma can do cheap RnD, manufacturing, but still maintaining quality.

So being an indian company, you can either play generics (like Ranbaxy), play export oriented branded play (like Ajanta), play an niche (like torrent pharma for cancer), do CRAMS (like Divis), manufacture APIs/PFIs/FDs (Granules, Aarti drugs, Omkar speciality), do cheap RnD and play patent game (Glenmark), or find niche in some non-regulated market (Caplin). The next big area could be quality branded ayurvedic medicine (with increasing awareness for goodness of yoga and ayurvedic stuff, and availability of ayurvedic medicine in nice packaged form, it is a sector waiting to fly off). Waiting for the day when divya pharmacy of Ramdev baba come with an IPO.

In summary investing in indian pharma play is investing in a non-cyclic (so you don’t have to bother about where sensex is heading), cheap but still maintaining quality business, which is getting benefited from domestic rising middle class and patent cliff and resulting margin pressure of big pharma. It is pretty much like investing in IT sector during Y2K time, but unlike Y2K patent cliff is a real thing.

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8

There are better Generic players of Indian origin than Ranbaxy. After what Ranbaxy did (read here :http://features.blogs.fortune.cnn.com/2013/05/15/ranbaxy-fraud-lipitor/) I doubt how long will it take, to recover the lost ground in US, if ever at all.

CRAMs is a huge opportunity for the next 3-4 years at least (http://www.orissadiary.com/ShowBussinessNews.asp?id=35802) quoting from this report,

"Indian Pharma CRAMS sector valued at $8.2 Billion with 41.4% growth trajectory, Set To Triplicate global average of 12.6%.Shaping the global outsourcing industry including declining revenues from new drugs, increasing role of generics, pricing pressures are propelling this leading low-cost location to the center-stage. Indian CRAMS players see several other factors working in favor catapulting them to the high growth trajectory.CMOs in India continue to be the big-time favorites of some global majors looking to get some of their non-core activities outsourced to the third parties.

The Four Players who are in competition with the coveted Awards are Akums Drugs & Pharmaceuticals, Rusan Pharma, Medreich & Neuland Laboratories."

Interestingly the 4 players mentioned here arehithertounknown. The reports gives a brief overview of these players.

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I am keen to add a basket of 2-3 pharma companies into my long term portfolio, Currently I do not hold any. Reason for 2-3 and not 1 name is due to my lack of knowledge (relatively speaking).

Typical characteristics of a long term holding would be a 20+% growth track record and expectation in future for next 5+ years at least, good financial ratios, strong moat( which am unable to figure, at all) , decent dividend payout ratio etc…

So to speak, the companies which one can speak in the same breath as hdfc bank, page,Titan etc… From pharma space.

Could ppl having understanding of this sector help me please.

I have sun and lupin as candidates in my mind.

I do have some holding of unichem,Ajanta and AstraZeneca in medium term portfolio.

10

Why no one talks about IPCA and Torrent Pharma? Both are well managed pharma firms and are steady compounding gems. IPCA has got a re-rating and is on a higher PE while Torrent looks attractive. Market thinks growth prospects are brighter in IPCA than Torrent. My view is that both are good companies. Please let me know if you folks think otherwise.

11

This news has got me thinking , if there is really a page/hdfc bank equivalent story in pharma sector ?

http://www.business-standard.com/article/companies/sun-pharmaceuticals-a-bolt-from-the-blue-113061300675_1.html

I considered that to be Sun and Lupin, but now am not sure again.

12

Several websites have listed blockbuster API / formulations for the year 2020. Sales and other information was not available on this websites. I barely begun to scratch the surface on these drugs. Following is my compilation, there is tons of information on every medicine. While my effort was to get accurate data I cannot guarantee the same

image
image1347×517 29.5 KB

Quite evident that market is responding to various versions of treatment for psoriatic and psoriatic related diseases, rheumatoid arthritis, various cancers. Majority of the drugs have either met or exceeded last year sales.
If we take a birds view on the cross section of the medicines, these tend to serve for senior citizens (psoriasis, Arthritis, age related visual impairment, we are seeing occurrence of cancer in all ages but majority of them are senior citizens). I think this trend would continue, blockbusters serving senior citizen patients.
Generic versions (may be less effective) to treat these diseases are being manufactured and sold by Indian companies. More research for local companies is required

1 Like
13

Hi, Here is my thesis about a closely tracked stock. I am looking for opinions if I am thinking in the right direction or not.

Kwality Pharmaceuticals Limited is an India-based holding company. The Company manufactures and exports pharmaceutical formulations in liquid orals, dry syrups, tablets, capsules, sterile powder for injections, small volume injectables, ointments, external preparations and oral rehydration solution (ORS)

While the Stock has run up from 100 rupees to 900 rupees according to the latest results:

Sales : 300 Crore

PAT : 94 Crore

I believe the remarkable performance by the company calls for a discussion.

Management has maintained it is able to repeat its first-half performance which means a PAT of FY PAT of 180cr+.

This translates into EPS of 180 and pe of 4.63 with an industry avg PE of 26 (Bulk Drugs).

Further 2 plants will get commissioned in next few months.
Company has also mentioned that due to Remdesivir and Propofol - it has gained a lot recognition in the international market and got PHARMACEUTICAL INSPECTION CO-OPERATION certificate.
According to even basic calculations, this stock deserves a PE rerating because of

Stellar performance
Margin expansion
Confidence in repeating the performance for the coming years.
Hope to get your view point on this situation.

2 Likes
15

Hi Kartik,

Hope you are keeping well.

The screenshot does not capture the latest results posted by the company.
In terms of numbers for the last 6 months ( March 21 to Sep 21). It reported:

Sales: 300 Crore - 154% growth YoY
PAT: 94 Crore - 1241% growth YoY
Margins: 43.3% - 3180 bps YoY

And at the same time management guided ;- it will be able to repeat its first-half performance. Which puts the numbers at:-

Sales: 700 crore (as mentioned in Annual report)
FY PAT at : 180cr+
EPS: 180
PE: 4.63 with an industry avg PE of 26 (Bulk Drugs).

Link to latest results : https://www.bseindia.com/xml-data/corpfiling/AttachHis/cb37db8e-e826-4cd3-b485-155595c35b44.pdf

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thanks Kartik for taking the time.

1 Like
18

I agree with your views.
Even if company make annual profit of Rs. 100 crs (company is projecting 180cr) then minimum mkt cap should be Rs 1,500 cr and price should be Rs. 1,500 … even conservatively min price will be Rs. 1,000.