The last couple of years the market has been gung-ho about all the sales
growth coming from pharma company exports to USA. In fact any company that had
low share of sales to the US market had a dramatically different (lower) valuation
band compared to the companies with greater presence there (USA). In spite of the
greater earnings stability of the former (low US market share companies) from a
regulatory perspective. In addition:
·
Retail pharmacy chains are far more consolidated (with a few large
players making up majority of the market) in USA, than anywhere else in the
world, hence you are playing a lowest cost game with group of large and knowledgeable
buyers.
·
The consolidated nature of retail pharmacy chains, in a way also reduces
barriers to entry.
·
Unless of course a company has a
first to file which gives it six months of selling exclusivity and some head
start in the market as a brand. Even then there are always USFDA data or
manufacturing audits that can upset the apple cart, when the company is rushing
to be the first and could make some mistakes(i.e inadvertently take short cuts) .
In face of such clear risks, buying the most popular pharma growth story,
comes with its risk ,as the stock of one of largest market cap company’s clearly
showed with a correction of almost 30% )
from the top of March 2014 to now (due various concerns like a possible growth
slowdown and a rare special audit ordered by the USFDA). Another large cap
company in the sector similarly had its stock fall 21% in one month on adverse USFDA
observations. Factoring these business
risks appropriately, depending on the company under consideration, therefore buying
only when there is a margin of safety tends to protect downsides, and puts you
and your portfolio in a favourable situation with respect to returns in a
business cycle of 5-7 years.
Dinesh da Costa, CFA
Please note information given above
is not a recommendation to invest, but an educational illustration.
Please leave your
comments by emailing at dineshd@zarainvestmentadvisory.in or if you have a Google account by clicking
on the link below
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