Fund managers bet on pharma sector as pricing pressure in US is stabilising

The pharma and health care sectors have not been market favourites. Over the past five years, the Nifty Pharma Index has given a compound annual return of -3.27 per cent compared to the Nifty 50’s 7 per cent. Experts, however, say that the worst is behind the sector now and investors with a three- to five-year horizon can earn good returns from it.

A major headwind for the sector was US Food and Drug Administration (USFDA) regulations. Plants of many pharma majors failed to pass inspections, and were barred from supplying to the US market. “Indian pharma players are more compliant now,” says Vrijesh Kasera, fund manager, Mirae Asset Healthcare Fund.

Indian players also faced pricing pressure in the US due to two factors. One was consolidation among drug purchasers in the US. The other was the entry of smaller players in the generics space leading to higher competition. “Structural changes like implementation of the Generic Drug User Fee Act (GDUFA), which increased competition, and consolidation of buyers, which kickstarted generic price erosion, led to US revenues stagnating or registering negative growth,” says Meeta Shetty, assistant fund Manager, Tata Mutual Fund.

Things are looking up now. “Price decline in generic medicines in the US market is stabilising now. A couple of global generic pharma giants have decided to trim their generics portfolios. Indian pharma players that are backward-integrated and enjoy a low-cost advantage are set to benefit from this. We also expect export growth to revive,” says Mahesh Patil, co-chief investment officer, Aditya Birla Sun Life Mutual Fund, which launched the ABSL Pharma & Healthcare Fund last month.

Valuations have turned attractive. “The pharma index is trading at about a 20 per cent discount to its own long-term average,” says Patil.

The Indian pharma sector has many attractive opportunities before it, such as the growing adoption of generic drugs in developed markets. Within generics, demand for complex and speciality drugs like injectables and biosmilars has been growing. “Indian pharma players have invested heavily in research and development in these spaces and will benefit from their growth,” says Pritam Deuskar, fund manager, Bonanza Portfolio. Players in the contract research and manufacturing (CRAM) space are also likely to do well due to their cost advantage. 

The domestic market is expected to clock a CAGR of 10-12 per cent. Many pharma funds invest in segments like hospitals, diagnostics, and wellness, which are growing at a faster pace than pharma. 

However, it may be some time before investors see returns. “After four-five years of downgrades, it will take time for investors to acquire confidence in this sector,” says Kasera. 

When selecting a fund, look for a track record of stable performance and a fund manager with deep experience of this sector. Exposure to these funds should not exceed 5 per cent of the equity portfolio. “Those investing directly in stocks should look for players with strong R&D capability, who are are well funded, and focus on high-margin drugs,” says Deuskar.