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Still, analysts try and forecast the future for the pharma companies!
Since earnings from new products tend to be lumpy and
unpredictable, a degree of estimation is needed. The preferred
method of valuation is the Discounted Cash Flow or DCF. The
future cash flows are estimated and brought to a present value,
assuming a rate of discount. So, in a sense there is a high level of
estimation, forecasting etc. Hence we find that most pharma
company stocks always seem expensive to us.
What I like to do is to be very careful when it comes to Indian
companies. There are some companies where there are
management concerns and I will stay far away from them. A
basically dishonest promoter cannot remain honest for too long. At
some point, he will bite you. Once this screening is done, I like to
look at the ROE. Then the spread of domestic vs global business. I
prefer a company with more domestic business, since the risks of
litigation, pricing, IP etc are lower in India. You have to really know
the industry to take a call on a player who has businesses in this
industry across the globe. I have none and so my choices are
limited.
The stock that you pick could be an Indian or a MNC. MNCs typically
make money by selling their globally patented drugs and OTC drugs
at good margins in India. They do not spend much on R&D from the
Indian Balance sheet. I find the MNC pharma companies relatively
safer because they seem easier to understand.
I keep away from Indian companies that go on a spree of acquisition
partly because I do not understand the industry enough and partly
because I suspect most acquisitions.