Despite serious meltdown in markets and in MidCap section in the first seven months of 2013, Pharma industry in general has done exceedingly well surprising quite a few. Many experts believe that this is a result of improved performance from pharmaceutical companies in their operations and rising profitability.
However when one attempts to check the difference in prices between January and November 2013, Pharma index has gone up by 19% though only four companies managed to rise more than 10%.
Pharma index has 10 companies included in it and out of them even though only four have risen beyond 10% the growth in index recorded was 19% making one believe that all is well in the Pharma sector. On a closer look we noticed that Sun Pharma has recorded in appreciation of 63% and constituted about 25% of the total market capitalisation of Pharma index. Lupin, Dr Reddy, Glaxo Smith Kline have also contributed to the increase in market capitalisation of Pharma index by being large cap stocks.
Piramal Enterprises also managed to stay afloat by regarding an appreciation of 7.5% and simpler just being around the same level it was in January 2013. All other stocks have gone down in value. When we take a close look at the profitability of the entire Pharma index we will notice that the profit levels have been on the decline from the second quarter of 2013 posing serious questions about Varity of any further rise in prices.
December 2012 has produced in EPS half around 254 Pharma industry while the same has dipped to 220 levels when 6/10 companies have announced the results for 2013 September quarter. However the index continued to rise upwards defying the laws of gravity and also overtaking the historic PE of 31 for the entire Pharma industry. With profits falling and PE about historic average, the future certainly looks doubtful and any investments with a hope that prices will continue to rise, may end up in deep disappointment.
This brings us to the question of whether one should continue to hold the Pharma shares at this juncture are should consider selling them at whatever price they could get. From the perspective of fundamentals Vivekam believes that one should consider staying invested in Dr Reddy’s and Cadilla but not any other share if one were to believe that fundamentals lead to price discovery in the market. There are quite a few profitable opportunities waiting for investors outside pharma sector, which appears overpriced on most parameters.