What is the fuss?

This is the post of my stock market learning, and developing a personal framework to buy, and more importantly, sell a stock. I use Gland Pharma, a recent 2020 IPO company, as an example. As I bought this stock, driven by FOMO, kept on building position due to incomplete research & false hope, but finally built a framework to take the decision for me on buy/sell.

This post is not about a stock, but about my initial years’ learnings in the stock market. And finally, being able to sell a stock which constituted 10% of my portfolio, at a staggering 45% loss. Learnings from success are often fleeting, learnings from own failures mould a better & wiser you. Lets get started.

The Company — Gland Pharma

Gland Pharma started as a simple contract manufacturer of liquid APIs (parenteral products) in Hyderabad in 1978. It slowly expanded into generic injectables business, and became a global dominant niche player in the same. Generic injectables are drugs that are manufactured for administration through intravenous or intramuscular injection. These are difficult to manufacture, owing to high quality and safety standards to be met. But first, a little bit about generics in general :-).

Generics mean producing a cheaper copy of an innovator drug. When a new drug is launched, usually after clinical trials etc., the company (innovator company) who launches the drug, gets a certain years of exclusivity. During these exclusive years, only the innovator company has the right to manufacture and sell this drug. The innovator company usually charges a high MRP on these drugs, to recoup its investment in research and testing, and build cash flows for future pipeline of new drug research. After the exclusivity period ends, generics companies start making copies of this drug, and sell it at a fraction of the cost of innovator drug.

Now, over time, generics industry has become competitive. Think of the likes of Dr Reddys, Sun Pharma etc. These are all Generics Pharma companies. To leave competition behind, and inch towards higher margin business, simple generics companies have moved towards branded generics, complex generics, and bio-similars (new business vertical altogether).

Gland Pharma, in some ways, is not a simple generics, but a niche player in injectables space. This gives it a competitive advantage, as complex generics are hard to enter (high entry barrier), and harder to retain regulatory and quality approvals year over year.

Due to Gland Pharma’s cost advantage (driven by India as a manufacturing base), it enjoys technology transfer agreements with innovator Pharma companies. The innovator companies willingly transfer technology to manufacture, test, and package products in Gland’s facilities.

Gland Pharma is majorly a B2B company, which makes innovator companies feel at ease when working with it. They know that Gland Pharma will not, one fine day, become its competitor, and start selling generic drugs under its brand name.

Gland Pharma’s output products are delivered via liquid vials, filled syringes etc. It is constantly making strides to go deeper into complex injectables space, launching new products over years, in this space.

So far so good, now lets get to why did I buy Gland Pharma.

My Reasons to Buy Gland Pharma

Buy Reason 1: FOMO

FOMO, or Fear of Missing Out. It was Dec 2020, the start of a 1 year bull run. Nifty 50 (India’s stock index), will go on to deliver 25% annual returns till Dec 2021. IPO frenzy was on. And in the same month, Gland Pharma IPOed, and got listed at 21% premium to its IPO price. A stellar entry to the stock market world.

Post IPO, the stock quickly climbed from its listing price of INR 1,820 to its all time high of INR 4,350 within 6 months. A 140% gain in 6 months is unheard of in the equity world. Many finfluencers were busy creating videos, with bullish commentaries on this company. All this, led me to add Gland Pharma to my watchlist of companies.

This was FOMO, making me take a watchlist decision, which would eventually make me buy the stock. As soon as you put a company in your watchlist, it leads to you getting mentally invested in the stock, and also a little bit biased. Some investors, unlike me, might have just gone ahead and bought this stock at its all time high price of more than INR 4,300.

Buy Reason 2: Convincing Story of niche injectables business

I am someone who researches before investing. So I did some research using online articles and videos. The niche play of Gland Pharma in injectables is true, and very much there. The only other notable injectables play listed company, Gufic Biosciences, has not done as well as Gland Pharma. Despite starting earlier than Gland Pharma in 1970, Gufic Biosciences has struggled to make a mark in injectables. Even within injectables business, it is not as diversified as Gland.

This story definitely fares well for Gland Pharma. Further, its top line more than doubled in a mere span four years. The top line ballooned from INR 2,000 Crore in FY 2019, to INR 4,400 Crore in FY2022. Its Net Profits almost tripled in the same four year period, from INR 450 Crore to INR 1,212 Crore. Wow! That is some growth streak which will make an investor stop and notice.

Buy Reason 3: Impeccable Regulatory record

I have worked in a generics Pharma company in the initial 3 years of my career. So I thought, I know better than others. I can do a deeper research, and make a better investment decision across pharma companies. Or so I thought.

One key distinguishing parameter in a Pharma company, is its regulatory track record. This simply means that the regulatory body, who audits and approves a Pharma manufacturing facility, should give less warning reports in the audit. These audits, are actually a big deal. If the audit fails, the Pharma company cannot manufacture products from that facility. Zero revenue from that facility. Further, it dents trust of innovator Pharma companies from dealing with that manufacturer in the future.

Now, as it turns out, Gland Pharma has an impeccable record of getting regulatory clearances for its manufacturing facilities, without even a single warning letter. Even the audits of USFDA, one of the most stringent auditors in the Pharma world, has resulted in zero warnings. Based on my experience working in Pharma, this is remarkable. Passing an audit is one thing, but passing an audit without a single negative warning, is quite a tough feat to achieve.

This observation cemented my conviction in Gland Pharma. A Pharma company which takes audits seriously, maintains a high bar on quality standards, and has consistently proven this via regulatory audits, has got its priorities right.

Buy Reason 4: Solid Future Growth Strategy

The company has been talking of a solid future growth strategy. Key growth levers:

Lever 1: Entry to the huge China market, driven by the promoter group of the company — A Chinese giant which goes by the name of Fosun. This sounded like a plan. Fosun Pharma is a big Chinese company, and can unlock access to supply, distribution, and marketing for Gland in China, apart from some influence in fast tracking regulatory approvals. The synergy is good, with Fosun’s dominant local presence, and Gland’s niche in injectables.

Lever 2: Rise in chronic diseases, such as diabetes, whose drug is administered by injections.

Lever 3: 11% CAGR expected growth in injectables generics, vs 6% growth in overall generics Pharma.

Lever 4: Entry into new countries, namely South Africa and Kazakhastan.

Buy Reason 5: Anchoring Bias

I have been tracking Gland Pharma since its IPO, till it hit all time high of INR 4,350. And then the drop came, from INR 4,350 to INR 4,000, to INR 3,500, to INR 3,000. I saw INR 3,000 as a 30% discount to all time high price of INR 4,350, and started buying.

It was not until one year later, when I realised that this investor behaviour is called Anchoring Bias. A common mistake done by newbies to the stock market world. Not that anchoring bias was new to me, I had known about it since long back. But it was not until 2022 that I realised that I was probably showing traits of harbouring anchoring bias myself.

I was anchored by the recent all time high price. I thought the stock will recover, and reach at least the price it has hit before. This will give me an easy 30% profit in a short time. Big mistake. Most of the companies which fall from their all time highs (ATH), never ever get back up to achieve that ATH price point.

It has been 2.5 years since Gland Pharma’s all time high (ATH) price of INR 4,350, and as of November 2023 it is trading at INR 1,650, a 60% discount to its ATH.

And then I stopped buying more

Initially, I kept on buying Gland Pharma on every dip. The more it fell, the more I bought. Over the next 3–4 quarters, it fell to as low as INR 2,000. My average buy price was now INR 2,300, and Gland Pharma contributed to 10% of my portfolio in 2022.

And then, I stopped buying. I was only at a 13% loss in Gland Pharma. But it struck me that the company has been falling for more than a year now, showing no signs of recovery. It made me ponder over my investment in Gland.

There was news circulating of some problems with Gland’s promoter group (Fosun), and shortage of raw materials (syringes), which was told as the reason for a business slowdown. This seemed ok. Good companies do face short term slowdowns, and then they recover from it. These slowdown periods offer buying opportunity, which long term investors such as me should utilise.

However, since Gland was 10% of my portfolio, I decided to dig deeper to revive my conviction, before investing more, or even continue holding my current investment. On deeper research, as you will see in the next section, I was able to build a sell framework. And this framework took the decision on my behalf to sell Gland Pharma at a staggering 45% loss.

My Reasons to sell Gland Pharma

As I dig deeper into Gland Pharma’s performance, below reasons emerged, which made me take a sell call. My research included studying the company’s quarterly earnings, listening to quarterly earnings calls, and reviewing online public stock investment forums such as Valuepickr.

Sell Reason 1: The Pain of seeing more than 30% loss

The pain is real. The pain of seeing a 30% or more loss in a stock. And seeing this loss grow over 2 years, stings.

For those who self-invest, they have only themselves to hold accountable. I realised late the perils of buying a stock at its peak, following the herd, getting swayed by stock tips, and not understanding cycles in an industry such as Pharma & APIs.

Sell Reason 2: Underperformance relative to similar companies and the industry

What deepened my pain, was that other stocks in my portfolio were not in loss. 2022 was a bad year for the Indian stock market. Even then, my other stocks were down 0–5%, and not a staggering 30%.

When compared relative to Pharma industry, which remained flat in 2022 (Nifty Pharma Index), Gland Pharma dropped more than 60% in 2022 from its all time high. Other listed injectables companies, such as Alembic Pharma, Biocon, Gufic Bioscience, had done much better than Gland in 2022. These stats made me reconsider my buy decision in the company.

Trying to latch on to my buy decision, I considered this relative underperformance as a re-rating of Gland Pharma, from an overhyped stock to a normal performing stock. However, this raised the question -> Should I remain invested for 3–4 years to see the stock price gradually rise over the years. Or, I book my loss, and move on to better investment opportunities, which will give me higher returns in the next 3–4 years? The following three reasons made the choice for me.

Sell Reason 3: Management Not Walking the Talk

During quarterly earnings, the management of a company gives a future guidance for their business. A good management usually, more or less, achieve the guidance given. Slippage in some quarters is understandable. However, if a management is not meeting their guidance for 4 quarters in a row, it is a worrying sign. This means that the management is either not in control of their business, or they are misguiding the investors to keep the stock price from falling, or they are incapable of execution. Either of these reasons, in itself, is a red flag. Combination of them is, lets say, a deep red flag with a human skull staring at you and yelling run.

The same happened with Gland Pharma — their management did not meet their guidance for 4 straight quarters.

(a) Production on Sputnik V covid vaccine: Management kept on guiding for doing this, awaiting approvals. After couple of quarters, company had to book losses from the preparations done towards this initiative.

(b) Entry into China with their promoter’s help (Fosun): It has been 1.5 years, 6 quarters, and this hasn’t happened as of Nov 2023. It is funny, that Gland Pharma has been copy pasting this point since Q1 FY 22 in their investor presentation deck. The last copy paste being the Q2 FY 24 investor presentation.

(c ) Management’s Misguidance on Syringe Shortages: Yes, there was a global syringe shortage in 2021, as also called out by WHO in Nov 2021. However the syringe shortage got over in early 2022. However, Gland Pharma went on whining about syringe shortages negatively impacting their business in every quarter of 2022. This wasn’t true, as called out by several financial analysts, and finfluencers on social media such as Twitter and YouTube.

If the management is misguiding investors, consistently, how can an investor trust what they have to say in the future.

Compare this to other well governed listed companies, such as TCS, who have been honest and upfront with their guidance, even in bad times. Making up stuff dents the trust of your shareholders.

Sell Reason 4: Problems with parent group — Fosun

Many investors invest in a company because of its strong parent company. Some good examples in India are the Tata Group companies such as TCS, Tata Power, Tata Chemicals, Tata Consumer Products, Titan etc. Another such group is Murugappa Group, with its listed companies as CG Power, Tube Investments, Cholamandalam Finance.

A reputed parent company hints at strong governance, top notch execution, and focus on shareholder value creation. The vice versa is also true. A not so good parent company can create problems for the holding company. The latter is the relationship between Fosun Group, and Gland Pharma.

The problem with Fosun Group became public in June 2022, when Moody’s slashed its credit rating for Fosun Group, driven by the group’s mounting debts. By Sep 2022, there were news articles all around of the Fosun Group going on a selling spree, selling its assets to shave off some of its debt (read article here). And soon, the jittery news of Fosun Group looking to sell Gland Pharma surfaced, read article here.

With a troubled promoter group company, Gland’s fate became uncertain. A deeper research reveals that the now CEO of Fosun group, Mr. Guo Guangchang, has been arrested in the past on corruption charges (article here).

Quick diversion — do you remember the infamous Satyam IT company scam? B Ramalinga Raju, the then CEO of Satyam, was at the core of it. He was arrested, tried, and found guilty. B Ramalinga Raju owns 4% of Gland Pharma. Not a good indication, if not bad as well. Read article of this here.

A promoter company with bad governance, ruled by a CEO with corruption related cases and previous arrests, coupled with a majority shareholder who has been convicted of accounting fraud in the largest IT company scam in India, is a glaring red flag. At this point, I had made up the decision to flee as soon, and as fast as possible from this stock. The following last reason solidified my decision.

Sell Reason 5: Insider Selling by Top Management

The CEO of the company knows the quarterly financial results, before retail investors like us do. What if CEO knows that the quarterly result is poor, and after these results are announced, the company stock price will plummet? Well, a good CEO will do nothing. He will continue to focus his time and energy on the future of the company. A bad intentioned, shareholder unfriendly CEO, will sell his company shares just before the quarterly results are announced, in order to pocket profits before the stock price fell.

Latter is the story of Gland Pharma. Hence the sell reason 5 — Insider selling by Top Management. The MD & CEO of Gland Pharma, Mr Srinivas Sadu, sold his significant stake in Gland Pharma in late June 2022, just before the release of a poor quarterly earnings in July 2022. July 2022 was the first quarter which showed decrease in QoQ earnings, since Gland’s IPO. July 2022 earnings release made it evident that the Covid push driving Gland’s top line up, is now slowing down. This led to a re-rating of the stock.

Exact reason for this mass sale by Mr Sadu is not clearly evident. He might have been liquidating the eSOPs he would have received earlier. The timing of this sell just seem intentionally timed with selfish interests. With all insider trading a sell transaction, without zero buy transaction, in a company with constant declining stock price for over two years, is a worrying sign. Some top stock news channels have picked this up, refer article here.

Now, with my mind made up to sell, I was still undecided when to sell. I have seen several videos, read many articles on having a sell framework in place. It was time for me to pen down my sell framework, and let the framework take the decision for me.

My Sell Framework

Before building my sell framework, I needed to understand my tolerance levels. Having worked in startups, I know there are periods when a company faces industry and market headwinds. Where even the smartest of teams have to wait it out. Hence a couple of quarters of bad performance is within my tolerance.

I am a long term investor, with a horizon of three years and more. Hence short term headwinds do not deter my investment decision.

What I value the most, is good governance, zero frauds, and an experienced management who walks the talk. If the management underpromises and overdelivers, then nothing like it.

When I invest, I invest in the future growth strategy of a company. Typically this strategy spans multiple years. If this strategy falls apart, and the company has no alternate growth lever, my conviction in the company starts waning.

The vice versa of above investable criteria, is what will form the building blocks of my sell framework.

[1] Sell, if there is confirmed fraud in company/top management

A confirmed fraud in a company’s top management, is a big red flag. Allegations occur time and again. Allegations are fine, as long as the company cleans it up and takes corrective measures. However confirmed fraud is a red flag.

Continuous fraudulent allegations, and out of court settlement via paying money also leads to a red flag. If a promoter is knowingly doing insider sell trading, or buying with advanced knowledge of his business, then this is a non-shareholder friendly behaviour. An example is Lux Industries, whose top management keeps on being banned by Sebi for ill-intentioned insider trading. It happens like clockwork in Lux industries, every 3–4 years, with a ban on promoter and his family for 1–2 years, and then repeat. I stay away from such companies, no second thoughts.

[2] Sell, if there are known issues with parent (promoter) company

A promoter company, or a parent company, has a large say in a company’s stock market performance. A promoter company with history of fraud, corruption, and bad governance is bound to have a negative impact on its holding company. There can be exception, or a chance of a turnaround. However why take a chance, when I can just invest in a better governed listed company.

One such example company is Meghmani Organics, whose promoter Mr Jayanti Patel, was arrested, found guilty, and sentenced in an import scam in 2012. Result? The company was soon de-listed from the stock market, only to be re-listed in 2020 once the post Covid bull market started. What is worse, is that it got re-listed with the same promoter who was arrested in 2012, and his family.

[3] Sell, if current future strategy falters, with no backup strategy

I invest believing in the future strategy a company lays down for itself. I see if the company’s management is walking the talk on this strategy, and then slowly start building my position in the company.

Sometimes, the future strategy might have played out, or falters due to headwinds. The company needs to come up with a different future growth strategy, else it will stagnate.

One such example is Laurus Labs. Its ARV driven growth strategy played out by 2022. However, the company replaced it with new growth levers, CDMO (Contract Development & Manufacturing Organisation), and Bio Similars. This new strategy has been slowly executing over 2023, keeping me interested, and still invested in this company.

[4] Sell, if I hit a 40% loss in a company

This rule is more of a hard rule. How much loss can you bear as an investor? How much capital erosion can you tolerate? Many investors keep a limit, either as stop-loss order, or as a sell GTT order.

I remember seeing video of a finfluencer on YouTube (Shankar Nath), where he mentioned that he has a hard criteria of selling a stock when it hits 30% loss. He says that at 30% loss, with folded hands, he accepts his mistake in buying the stock. Whatever the mistake be, he makes the sell call then and there, at 30% loss, not waiting for more loss to happen, or hoping for the stock price to recover. He takes a hard sell call.

This, made sense to me. A 5–10% fall is volatility. A 10–15% fall can be temporary headwinds. A 10–20% fall is still tolerable. But anything more than 20% is questionable. Either you bought at a high price, or you were biased when selecting the buy price of the stock. Or worse, the company is actually doing bad, and this is evident from the quarterly results, but not yet out in news or in analysts’ recommendations.

To me, a 30% loss looked a little hard, so I have kept it at 40% loss. The day I see a 40% loss in one of my investments, I will accept my investing mistake, and sell. I will analyse my mistake later, pen it down over a blog post like this :-), and move on.

Note: Sell Criteria 4 is relative to overall stock market index. If there is a market crash driven by a pandemic, or war, and all stocks fall at same time, then this rule is not applicable. This sell criteria makes sense when the stock in question shows relative underperformance over time.

In order to be comfortable with implementing this criterion, one needs to have no more than 5% portfolio allocation to a single stock. This will ensure that your portfolio will not suffer significantly once you take the sell call on a loss making stock.

Above four points, is my sell framework. I might change this over time. However, I will have a good reason to do so, and I will pen it down to reinforce the sell criteria.

My journey with Gland Pharma came to an end

My average buy price of Gland Pharma was INR 2,300.

I sold all of my holdings in Gland Pharma at INR 1,200 in 2023.

Current trading price (Nov 2023) of Gland Pharma is INR 1,630.

I am not worrying, as my sell framework told me to sell. I cannot invest in a company with a troubled promoter, a non-shareholder friendly CEO, and a top management who misguides its investors. No sir, I am better off finding other well managed companies.

Will I invest in Gland Pharma in the future? I might. If the promoters and top management of the company changes. If the company comes up with a solid future growth strategy, and timely execute this strategy. And the company is available at fair or discounted valuations, then its a deal. In short, if my investment criteria is fulfilled, I will buy again. If not, then I will not.

Parting Thoughts

Establishing your own personal investment framework is important. I learned it the hard way. Once you have invested in a stock, you develop a bias towards this stock. False hope takes over logic and facts. You tend to downsize a negative news you hear about the company. In an unconscious manner, you develop an emotional barrier which makes you not sell that stock, and worse, hold on to a falling stock.

Selling a bad performing stock, at huge loss, is hard. Accepting your own mistake in investing in this stock is harder. A well formed framework takes away this emotional decision making, and let the framework take the buy/sell call. With this, you can now simply tell yourself, and others, that the stock no longer fits your investment criteria, hence you exited.

Investing, like any long successful career, requires a process to be followed, repeatedly, over a long period of time. As boring it might be, consistency pays off. The more mistakes you make early on, the lower its impact will be on your future wealth. And the more solid buy and sell framework you will be able to develop.

Do you have a bad performing stock in your portfolio? Which is it? And what do you plan to do with it? Do share in the comments below.

Disclaimer: This post is no buy or sell recommendation. Please consult your financial advisor before taking any investment decision, and better do your own research.