Pharma & DPharma: Some Inconvenient Questions

In the past 2 days, we have been witnessing spectacular rallies for 2 pharmaceutical stocks, Pharma and DPharma. What prompted the rally was an announcement on July 14 by the Science, Technology & Innovation Minister, Khairy that Pharma and DPharma will do the "fill-and-finish" process for the re-packing the Covid-19 vaccine when it becomes available (here).

We know that the market is getting wary of glove stocks after the spectacular rally, and many players are now looking for something else to play. So the above story seems like just the right catalyst to shift to new stocks that are (1) relatively inexpensive vis-a-vis the glove stocks and (2) they can still be counted as pandemic stocks. 

However, there are a few inconvenient questions which we must answer if and when we want to get into Pharma and DPharma. They are:

1) When will the vaccine be available? Despite promising progress made, the first vaccine will be at least 18 months from now. That's the optimistic case!

2) Will the vaccine be produced in sufficient quantity to reach our shore? This is a tough one. The answer is probably not for a few years as demand will continue to outstrip supply, and America- the epicenter of the pandemic- has shown that it is willing to use its enormous muscle to buy up everything.

3) Can Pharma and DPharma handle the fill-and-finish process? While they may have done similar process for other drugs or vaccines, the new vaccine for Covid-19 will be novel and involve complex chemistry. They may need special pharmaceutical-grade glass to be bottled in. This is taken from an interview given by Bill Gates in the Vox magazine back in April (here). When asked by the interviewer, Ezra Klein about how much of a limiting factor will the manufacturing supply chain capacity be, Bill Gates replied:

For some of these vaccine constructs, it’s hard to scale up the manufacturing, partly because they are novel or just because the chemistry is very complex. And you’re in a new regime when you talk about making billions of a vaccine. We don’t make billions of any vaccine. We make hundreds of millions, but for those, we’ve had decades to work on their efficiency.

Even the fill finish at the very end where you put it in a glass bottle, that’s a special pharmaceutical-grade glass — the world doesn’t have enough of that. So we’re working to get that underway because all the vaccine approaches need to be put into a bottle at some point in time. I hope we get to the point where it’s the manufacturing piece because those investments are at most billions to save trillions.

4) Where is the market for the end-product, the re-bottled vaccine? If it is for the local market, then that market is too small for the time and effort required to get into the business. I presume it would include overseas market, such as Indonesia etc. I remember our pharmaceutical companies needed a long time to apply for licenses to distribute individual drugs in Indonesia. I think the same should continue now and this will delay the business.  

Chart 1: Pharma's weekly chart as at July 23, 2020_9.30am (Source: Malaysiastock.biz)

Chart 2: DPharma's weekly chart as at July 23, 2020_9.30am (Source: Malaysiastock.biz)

All in all, I think we have to temper our enthusiasm to get into Pharma and DPharma as well as other pharmaceutical stocks which have gone up substantially. The investment basis may be comparable in some way to glove stocks, since they are deemed to be pandemic stocks, but the case for pharmaceutical stocks is very weak, unlike glove stocks. Be careful!

Glove Put Warrants Rally: Just Ignorance?!

Yesterday we saw a massive rally for the 2 put warrants for the high-flying glove stock Topglov and Supermx. Given the big rally enjoyed by all glove stocks, it makes sense to contemplate buying into these put warrants for a high risk, high reward play. Alternatively, some may consider buying them as a hedge or an insurance policy to protect their portfolio of glove stocks since the prices of put warrants would move higher when the prices of the underlying stocks dropped.


Chart 1: Supermx-HB's daily chart as at 14 July 2020_10.45am (Source: Malaysiastock.biz)


Chart 2: Topglov-HA's daily chart as at 14 July 2020_10.45am (Source: Malaysiastock.biz)

However, the trading for these put warrants yesterday was way beyond expectation, to say the least. Topglov-HA rose from 6.5 sen to 20 sen while Supermx-HB rose from 6 sen to 23.5 sen. Normally when you see a put warrant price going higher, you would expect to see the underlying share price going down. Not for Supermx and Topglov share prices yesterday! Both share prices rose sharply, with Supermx increased by RM2.36 to RM15.98 and Topglov increased by RM2.08 to RM24.00! What's going on here! This reminded me of the screen from the movie "Cats in the Hat" where we should all drive (here).

There is only one logical explanation for this: Ignorance! But the ignorance here also advertised the extreme euphoria in the glove stocks rally may be begin reaching an unsustainable level. But I could be very wrong. This fantastic rally has turned the famous phrase "irrational exuberance" by former Fed chairman, Alan Greenspan on its head.

I have reproduced here the table of valuation of the 2 put warrants, below. It was extracted from KL Warrant Screener (here).

Table: Topglov-HA and Supermx-HB valuation table 

This may be just numbers to some punters. If you really want to see how extreme these numbers are, check out the article entitled "The Glove Put Warrants Poser" in the Edge CEO Morning Brief today (July 14, 2020). I will paste here a snippet that might just do the job.

Notwithstanding your outlook on glove stocks, which I assume is bearish otherwise you should not get into the put warrant, the present premium for the 2 put warrants is simply unjustifiable. Be very careful what you are buying. Good luck!!

Market Outlook as at 6 July 2020

Last week, FBMKLCI rallied and re-established its position just above its previously violated uptrend line, SS. The recovery was fairly broad-based though the big gainers were concentrated in the glove stocks and the technology stocks.

Chart 1: FBMKLCI's daily chart as at July 3, 2020 (Source: Malaysiastock.biz)

The rally among the glove stocks, which is part of the health care sector, helped to push the health care index to a new high.

 Chart 2: BM Health Care index's daily chart as at July 3, 2020 (Source: Malaysiastock.biz)

Similarly, the rally in the tech stocks has pushed the Technology index to a new high in the current rally! At a close of 43020, Technology index is not far from its all-time high of 44610 recorded in January 2018.


Chart 3: BM Technology's daily chart as at July 3, 2020 (Source: Malaysiastock.biz)

The rally in tech stocks had earlier shown its potential when it helped FBMACE to make a new high in the current rally (see Chart). If you looked at the monthly chart (Chart 5), you will see that FBMACE has just surpassed the line connecting the high recorded its April 2015 & January 2018. This could mean that FBMACE may continue to trend higher. However, we should be careful to avoid a bull trap since the FBMACE stocks have rallied substantially over the past 4 months after it came off a deep selldown in March which was a bear trap.


Chart 4: FBMACE's daily chart as at July 3, 2020 (Source: Malaysiastock.biz)

Chart 5: FBMACE's monthly chart as at July 3, 2020 (Source: Malaysiastock.biz)

In the current market, where winners keep getting pricier and non-performers remain dull (if not down), it is hard to recommend stocks with strong conviction. If the market is too confusing for you, then you should stick to cash or those stocks that you are comfortable investing in. Just tell yourself, you have good companies if you are sitting on cash or staying on the sideline (here and here).

Technology Play: Which Sub-sectors or Stocks to Buy?

Last week, tech stocks have chalked up significant gain. If you wondering how to identify laggard tech stocks to add to your portfolio or watch list, this is one way you can consider.

Firstly, you need to identify which sub-sectors have shown out-performance. The Technology sector is divided into 4 sub-sectors: Digital Services, Semiconductors, Software and Technology Equipment. Below I have shown the steps to look at one of the sub-sectors, Digital Services. Then you choose "Price Change" and sort it by "Descending" order to filter out the out-performers.  

Diagram 1: How to pick out stocks in a sub-sector within the Technology sector

Below are the tables of out-performers for all the 4 sub-sectors of the Technology sector. You would notice that there are more gainers among the "Semiconductor" and "Technology Equipment" sub-sectors. This is not surprising as Malaysia is stronger in manufacturing than software or services.


Table 1: Top performers in the Digital Services sub-sector within the Technology sector


Table 2: Top performers in the Semiconductor sub-sector within the Technology sector


Table 3: Top performers in the Software sub-sector within the Technology sector


Table 4: Top performers in the Technology Equipment sub-sector within the Technology sector

After you have narrowed down the out-performing sub-sectors, you can choose the stocks to track or to buy. Assuming you want to buy the laggards; you should study their financial performance and the reason for their poorer financial performance. If you feel that the poorer financial performance may change, and the company's financial position is fairly sound, then you may position yourself in these laggards and wait for their turn to go higher.

You may try the same approach for Health Care sector. You will soon get the confirmation that this sector is pretty much all about glove stocks.

Diagram 2: How to pick out stocks in a sub-sector within the Health Care sector


Table 5: Top performers in the Health Care Equipment & Services sub-sector within the Healthcare sector

Look at the long list of out-performing glove stocks & related CWs above. The laggards among the glove stocks are not really laggards nor are they cheap. In my opinion, the whole glove stocks universe has gone up so much that you have to accept them not as value stocks, but as growth stocks which come with a high premium. The high premium can be justified if the earnings growth continues. If it stopped - or the market perceived that it may stop - the rollback can be very sharp.

That's what happened in late June when the market learned that glove prices have softened (here). Since then, the share prices rallied again, which could only mean that the report of the softening of glove prices was wrong or exaggerated. Anyway, that's the risk that you have to take if you get into glove stocks now.

The above are the steps that you can use to identify the out-performing sub-sectors in the Technology and Health Care sectors, and then you can pick up certain stocks to buy or track according to your investing or trading strategy. Good luck!