Everyone wants to live long. To live long, apart from doing, yoga, exercises etc, one of the things we need is medicine. Though, Ayurveda, Homeopathy offer medicines in their own form, It is the allopathy or the medicines, that we have in consultation with our doctors, to get rid of their ills, which has bulk of its share.That is where the pharma companies, come into picture. These companies, do a lot of research, develop a drug, get the approval of authorities concerned and sell it to us. This is a big industry and the current global business is around 1.2 Trillion US dollars. ie close to 7 lac crore rupees.
The Indian market is estimated to be 36 billion USD. Of late we hear that the pharma sector is not doing well and the share prices have come down anywhere around 50 to 70% from their two year highs. Let us understand, what is happening in the industry.
Though it is a big subject by itself, I shall try to make it simple to understand. I call it as the MAGIC
Before we see the MAGIC in detail, basically the pharma and chemical companies do manufacture any one or more of the following categories.
a. GENERICS. When a drug is invented, normally the company that invents applies for a patent and the period of patent is valid for about 7 years. Till that period, no other company, can copy or produce that drug. After the expiry of the patent period, it is open and other companies can manufacture same or similar drug. The drug then moves into Generic category. Generic drugs are those drugs after the expiry of the patent period.
b. API – Active pharmaceutical Ingredient. is the main drug itself, where the active portion of the drug is present. Almost every pharmaceutical company is having API manufacturing.
c. CRAMS – Contract Research and Manufacturing Services, is an outsourcing activity where the company engaged does the work for another company in research or manufacturing. This is similar, to Foxcon making electronic components for mobile phones and assembly
d. Biosimilars. A biosimilar (also known as follow-on biologic or subsequent entry biologic) is a biologic medical product which is almost an identical copy of an original product that is manufactured by a different company. Companies like Biocon, Dr Reddys are investing heavily into this activity.
Having understood the basics, the Pharma sector has the MAGIC issues.
M- Margins. Majority of the sale of products come from Generics and there is heavy competition and there are also price regulations by the governments. Indian companies, with majority of sales in the US is struggling against competition and Pricing.
A- Approvals Any new drug, needs to be approved by the regulator and the major agency doing this is FDA or US FDA. US food and drug administration. A company has to make ANDA ie application for new drug approval and after getting that only, they can sell the drugs.
G- Geography. The market in which the pharma company present is also important and determines the sales, regulations approvals and margins. Currently majority of the sales is from US and Europe and US is the major market for Indian Pharma companies.
I – Inspection. Normally approvals and Inspections are a combination. However, Inspection is an ongoing activity. The regulators, check the manufacturing companies for quality, process compliance and data integrity. These inspections are periodical and based on the report, they can even prevent the companies from manufacturing till the noted issue is resolved to the regulators satisfaction.
C – Currency. Since the business is from different markets, the currency rate, fluctuations and they in turn affect the net profit of the companies. Un hedged forex can swing the margins.
Currently anyone or all of the above ILLS are plaguing the pharma industry. So what is there for us an investors?
Having mentioned about the sector, it is an industry where there is high entry barrier for competition and new companies to enter the sector. The skills required are also of high order and difficult to acquire easily. The companies are there for long haul and there are no fly by night operators. The quality of the management is very important.
a. Many companies are working hard to adhere to the compliance and overcoming any deficiency observed.
b. The data integrity and systems are improving.
c. The managements are committed and we have seen that some of the companies, who were issued observations like DR Reddys, Wockhardt, Divis Labs are already have got clearances.
d. This is an industry which is for long haul and This is suitable for those investors, who can with stand oscillating pressures .
Do choose the company and stay invested. If you cant chose the company, go for a pharma fund through the mutual fund route
Do contact me for any clarifications.
What are the forces at play while doing a bungee jump?
There are three main forces at play.
- The gravitational force, which pulls you down as you jump
- The force the spring provides which helps you from not falling and also enables you come up.
- The force or the resistance offered by air.
But for the air resistance, you can keep going up and down. But the air resistance, acts on the spring force and reduces your ascent back every time when finaly the fall and climb ends. The important thing is that when the gravitation force does positive. work the spring does negative work and when the spring does positive work gravitational force does negative work. All the time air resistance does negative work.This is akin to Your Portfolio appreciating or depreciating but inflation always does negative work and erodes the purchasing value. Your portfolio has to do super positive work to over come inflation and grow
click on the link, to read more about the force.This is classic conversion of potential energy to kinetic energy and back. But why we need to know this and what relevance it has got with investing?
Market is a place where people buy and sell goods or services. In stock market, people buy and sell shares or other instruments. There is difference in perception of the buyer and seller and hence exists a price difference. Like three forces exists, In a market there exist a buyer, a seller, and volatility.
Appreciation, depreciation, and inflation.What you buy may appreciate or depreciate in value depending upon the market forces
There are basically two energies on display.
The potential energy, the height from which the jump takes place and the kinetic energy which is either due to the gravity or the spring force. However the level of energy gets reduced for every movement due to the air resistance
Markets see that the stock prices or NAV of a fund, move up and down depending on the energies which is the momentum on selling side or purchasing side. And the air resistance is similar to inflation and does constantly erode growth in wealth.
See how some stocks have done bungee jump in the last one year and Who can do bungee jump?
Anybody can do a bungee jump.
In bungee jump, there is a trainer who guides you and helps you, take the jump and also land safely after you finish your jump.This is similar to an advisor, who guides you through the process of investing and enabling you to reach the goal or the destination. You get to experience the ups and downs and the resistance offered by air. You get to see the world with a different point of view.While staying the course of investing, in order to reach your goal, yet get to see all the risk, volatility, momentum and performance at play.
- Your behavior is controlled and you are disciplined during the jump. If you can exhibit a similar discipline and behavior in investing, you are sure the winner.
- Fortunately, you don’t get to hear any noise during the jump as you are isolated from the media. Avoid noise from the media while investing.
- More importantly, you have to indulge in the activity to gain and like wise, you have to invest to create wealth.
When to Jump ?
You cannot take to bungee jump, whenever you feel doing it. It depends upon the weather, the time of the day, availbility of the trainer etc. Follow the 5W 2h process in all activities you do What, why, where, who, when. How and the new one you add is ” How Much”?
I am your trainer and do contact me for the experience of a bungee jump in investing. Schedule a free introductory call with me on tlk.to/varadha
What ever is bought with money needs to be monitored and managed. You cannot manage if you don’t monitor it effectively.
Both inventory and investment are bought with money and how they help you earn returns is measured. In inventory, the turn over of the inventory or the rate at which the inventory is rotated is a measure. Many traders and distributors operate on a thin margin of as low as 2% and rotate the inventory multiple times with the same capital to maximise their returns.
Similarly, Return of Capital employed is a measure and this for investor means Return on Investment ( This is the sum of capital appreciation and dividend earned)
Inventory management is an important one in all organisations and also households.
Though inventory is counted as current assets, it will become a liability if not managed effectively.
We don’t buy anything because we have money.
Understanding of Inventory Management
Let us understand how inventory is managed.
There are different control mechanism and methods in managing inventory. At least you can count 9 important ones.
The most common ones which we can look at are
This is done based on valuations of the individual parts. Generally 20% of the parts constitue 80% of the total value of inventory and major attention is given to manage the parts of high value which are known as A. The least value items are classified as C
In the second one, VED analysis, the classification is done based on importance of the part. A part which is when not available, can halt a manufacturing process, or difficult to get, and a combination of these determine its vitality and Similary, E is essential and D deisrable.
This analysis supercedes the previous one, as it is on vitality and not on price.
The FSND focuses on the rate of consumption of the parts whether they are fast moving, slow moving or even Dead inventory.
Understanding of Portfolio management
Like wise when you do an investment, do you review your portfolio.
Construct a portfolio and identify the stocks you must hold, which are vital for the portfolio.
This may vary with individuals as the investment horizon, objective and risk tolerance would vary.
Having too many desirable stocks, compromising on vital stocks, may lead to lower portfolio return.
This is normally done, drilling down sector wise and picking the stock that you must have in your portfolio.
For example, you may identify L&T in the capital goods sector which could be vital for you, Siemens could be an essential stock and stocks like, VA Tech vabag or carborandum universal could be desirable one.
2. FSND Analysis
Though this cannot be adapted like inventory management, identify stocks which are not performing well and see no scope but you have in your portfolio.
Some of you may still be holding Jayaprakash associates, Unitech, Indian overseas bank. Which or either dead or recovery would be very long. These are Dead and D in the FSND technique.
FSN, can be us can also be linked to the ability to liquidate the stocks at the earliest, large caps, midcaps will have a great liquidity. There are few illiquid stocks, like Benares hotels, which is a TATA group stock and trading thing. Depending on the return, liquidity and availabilty of capital
3. ABC analysis
Unlike in inventory, this is redundant. Our primary focus would be earn return and reduce risk and reduction of risk done using diversification.
But generally investors have myth and that is stocks which are over say Rs. 1000 are costly and stocks less than 100 or even 50 are cheaper.
Bajaj Finance moved from 4000 in April 15 and is now at 10000 though it is trading trading at 1000 after bonus and split.
Have ABC in relation to the value the stock offers and not the price.
Therefore to sum up, use the grid below and pick your stock.
Summary & Takeaways
Know what you want to do with your investment.
Clarity of purpose and clarity of action are
There are three types of assets
A appreciating asset which creates wealth over time
A depreciating asset, which depreciates your investment, but does not erode the wealth.
A dead asset, depreciates and becomes a liability. Know what you have, monitor and manage it
It is possible you may not know and understand the above. Have a chat with your advisor
Do contact me for any clarifications.
Just wanted to share this story.
Once there lived a businessman. But he lost lot of money in the business ventures and became bankrupt. He was under pressure from his lenders and was not able to bear the pressure or pay up. He prayed hard to God for money so that his problems could be solved. This did not happen but he continued praying.
He decided to commit suicide and one day he bought a bottle of poison after deciding, that was the best way to die, that night. He however decided to sleep that night one last time and die the next day morning as it would not make any difference.While he slept that night he had a dream.
God appeared In his dream and told him that he wanted to help him. He asked him what he wanted. The merchant told God he wanted Gold and money so that he can clear his loans and start a new life. God told the merchant that next day morning when he wakes up, he should go to the backyard of his house,where a small garden was there. He will see a snake coming. All he has to do is to catch the snake. Once he does his problems would be solved. Stating this God disappeared.
The merchant woke up the next day and remembered the dream and what God had told him. He wasn’t sure. But decided to go to the backyard. After some wait he saw a snake coming from one corner. As things were happening as per dream now he had to go and catch it.
He was still not sure of the dream and secondly he was scared to go near the snake. Time was ticking. He was in a dilemma but the snake was moving from one corner to another. Still nothing happened and time as running out.
The snake by now had crossed the garden and slowly started entering a hole near a tree . Still the merchant was scared and unsure. The snake was on its last leg and had almost entered the hole.
Now the merchant mustered courage and decided to test what God had told him and he rushed to the hole near the tree. As he neared the hole the 6 feet long snake had entered completely except the last few inches of the tail. The merchant put his hand and caught the snake’s tail.
Guess what happened??
The inches of the snake’s tail turned into Gold. He was surprised and very unhappy. He thought,if only, he had caught the whole snake he would have got more Gold which could have rid him of all problems.
Now, what has this to do with our investing?
Most of us, while investing, we behave like the merchant. We want the best but we are scared. I remember this quote
“ All investors want to do today what they should have done yesterday” – Larry Summers
Some the lessons we can infer from the above story
a. There is a risk to every reward. This does not mean that high risk will always yield high reward.
b. Even if God, says something, we don’t have faith. Therefore it is human not to believe or trust the advisor who gives you options.
c. We always want to enter the investment at the end of the cycle, when we should not be entering and blame our luck.
d. Don’t time the market. Time in the market is very important.
e. More importantly act. Start early to get the benefit of time invested, or the power of compounding.
f. Have a financial goal.
g. Review at least once in a year.
If you follow the above guidelines, you can also be a “Midas, with the Golden Touch”
Please do contact me for any assistance to build your portfolio