During a time period when completely unprecedented economic turmoil is roiling the financial markets, shellshocked investors are increasingly looking for “defensive” stocks. The concept is simple - when times get tough, companies that sell the goods and services that remin in more consistent demand ought to hold up better.
Food, beverages, cleaning products and other consumer staples are generally thought of as broadly defensive because they’re they last thing people stop buying even after they’ve experienced a disruptive event like the loss of a job.
For better or worse, tobacco and alcohol also tend to do fairly well.
Most people can defer the purchase of a home, an auto, even clothing when it becomes financially necessary. Discretionary leisure activities generally get punted immediately as consumers economize to make sure they can afford the true essentials.
One industry that tends to have fairly consistent sales regardless of where we find ourselves in the economic cycle is pharmaceuticals. Obviously, people with chronic conditions need to continue taking therapeutic medications. In most cases, those drugs are paid for either partially or totally by insurance reimbursements.
While all pharmaceutical companies might seem quite similar on the surface, those that produce off-patent or “generic” drugs tend to have even more consistent results than the industry as a whole. They avoid the boom-and-bust and bust cycles that can plague Pharma companies that do research and development. Though new “blockbuster” drugs can be enormous moneymakers, it can take a long time and a lot of capital to make it through three (or more) rounds of clinical trials for regulatory approval.
Dr Reddy’s Laboratories (RDY - Free Report) was founded by a physician in India in 1984 and initially provided the raw materials to other pharmaceutical manufacturers, but fairly quickly realized that the expertise they had gained would allow them to develop their own generic versions of in-demand medications and navigate the approval process at regulatory agencies around the world.
The company also gained valuable experience in the arena of international property law, defending their own patents and successfully fending off challenges from competitors.
Here’s a simple analogy: Do you remember the salacious news story from 2015 when the “pharma-bro” Martin Shkreli and his companies Retrophin and Turing Pharmaceuticals acquired the rights to manufacture several therapeutics for rare diseases and then raised the retail prices of those drugs by huge percentages?
Shkreli was widely derided in the media for attempting to take advantage of regulatory loopholes to profit from a patient’s need for life-saving therapeutics. (He also found himself incarcerated in Federal prison after being convicted of unrelated securities fraud charges.)
Dr Reddy’s Laboratories is essentially the exact opposite. They provide formulations of innovative medicines at affordable prices to patients around the globe. Having become adept at navigating the regulatory environment in multiple countries, hundreds of millions of patients currently enjoy safe, reliable access to the company’s therapeutics. The health outcomes of real patients are improved while Dr Reddy’s leverages it’s large scale to deliver consistent profits at strong gross margins.
There’s a small list of companies that can boast a 30% rally in share price in 2020 and also overwhelmingly positive earnings estimate revisions.
Dr. Reddy’s is close to a perfect investment for the current environment. There's constant demand for it’s products, and they enjoy a truly global reach with penetration into the markets, from developing economies to the world’s richest companies - and everything in between.
In a very uncomfortable environment, investors can sleep easy while owning a profitable company that’s doing their part to keep the world healthy.
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