Thinking of buying a pharma stock?
How to read a pharma stock
Medicines for India and the world, with regulators watching every factory.
How they make money
Make generic medicines: copies of drugs whose patents have run out.
Sell them in India and export them, often to the US.
Spend on research to launch new medicines before rivals do.
Numbers to check
Tap any number for a full lesson with pictures.
- Sales (Revenue) GrowthNew launches and exports drive growth. Slowing sales can mean old products losing price.
- Operating Profit MarginShows how much pricing power its medicines have after research and factory costs.
- R&D Spend to SalesResearch today is tomorrow's product list.
- Return on Capital EmployedFactories and research need a lot of capital. ROCE shows if it pays off.
- Debt-to-Equity RatioBig acquisitions abroad are often funded with debt.
- Price-to-Earnings RatioCompare with other drug makers, not with the whole market.
Practice: Neem Pharma's numbers
Neem Pharma is a made-up company that makes and exports generic medicines. Here's how its key numbers read against the rough guides.
| Number | Neem Pharma | Rough guide says |
|---|---|---|
| Sales growth | 11.1% | Steady |
| Operating margin | 20% | Decent |
| R&D spend | 7% | Moderate |
| ROCE | 16.7% | Good |
| Debt-to-equity | 0.2x | Low |
| P/E | 30x | Middle |
For a real company, check each number over at least five years and against its closest rivals. One year alone can mislead.
Also look at
- USFDA inspections: a warning letter can stop a factory from selling to the US.
- US price erosion: generic prices fall as more rivals launch the same drug.
- Approvals in the pipeline: new products waiting for regulators' go-ahead.
Red flags
- A USFDA warning letter or import alert at a major factory.
- Most of the profit coming from one drug that's about to face competition.
- Research spending cut to prop up profit.
Numbers that mislead here
- Price-to-Book RatioResearch, approvals and brands, the real assets, aren't fully on the books.
Other sectors
Banks
Their raw material is money, so they need their own set of numbers.
NIM · Gross NPA · CASA · Capital adequacy
IT services
Their product is people's time, sold mostly to clients abroad.
Sales growth · Operating margin · Attrition · ROE
FMCG
Everyday products like tea, soap and biscuits, sold in every town.
Sales growth · Operating margin · ROCE · ROE
For learning only. Example companies are made up, and the rough guides are rules of thumb, not targets. Nothing here is advice to buy or sell any stock.