Pharma funds lag sectoral peers despite Covid tailwind as US market weighs

Pharma funds have remained laggards among sectoral funds despite a sharp rally in pharma stocks last year in the aftermath of the Covid-19 outbreak.

These funds have shed 3 per cent during the last three months and have gained 29 per cent in a year even as the NSE Nifty Pharma index has shed 2.6 per cent and gained 25 per cent. In comparison, the Nifty 50 index has gained 12 per cent and 51 per cent, respectively. In the year to date, the Nifty pharma index has returned 8.8 per cent, with 10 of its constituents giving negative returns.

Pharma funds have given lacklustre returns in the past few years owing to headwinds on the compliance and pricing front in the US. Fund houses such as ICICI Prudential, DSP, IDBI and Mirae Asset had launched their pharma and healthcare fund offerings in 2018 and 2019, expecting a change in fortunes.

“The earnings for the pharma universe would moderate and come in flat YoY, after seven quarters of healthy performance. Increased competitive pressure on the US base business, coupled with the reduced pace of launches and lower Covid-related off-take take is expected to drag down the overall sector performance in 2QFY22,” said a recent research note by Axis Securities.

The brokerage expects the current phase of competition in the generics segment and elevated price erosion could sustain for a few quarters. Further, compliance related news flow could add volatility in stocks as physical inspections have been commenced by USFD. Currency appreciation could improve the topline by 1.5 per cent on YoY basis, the brokerage said.

Pharma companies did well last year as domestic sales improved and exports picked up pace, with the developed countries providing several exemptions for fast approvals and reducing the number of physical inspections owing to Covid-19.

“A lot of Indian units have come under adverse observations from the US FDA this year as physical inspections have resumed. The generics market is seeing increased competition as well,” said Deepak Jasani, head – research, HDFC Securities.

The Nifty Pharma index includes heavyweights like Sun Pharmaceutical Industries, Dr. Reddy’s Laboratories, Lupin and Cipla, and some of these stocks have not performed well in the past few months. “Lupin is facing issues on the exports front, while Sun has not been able to quicken the pace of turnover growth. Dr Reddy's Laboratories, which had rallied quite a bit last year, is seeing a correction,” said Jasani.

Brokerages such as Sharekhan have a positive view on the sector. “Indian pharmaceutical companies are among the most competitive ones globally and, over the years, have developed strong capabilities, which have laid the footing for strong growth ahead,” the brokerage said in a recent note.

The confluence of factors including improving growth prospects in exports as well as domestic markets and focus on specialty/complex products in addition to emerging opportunities in the API space would be key growth drivers for the sector. “Improving growth prospects in the domestic market could benefit India-focused MNCs. Collectively, this points towards a strong growth potential, which would unfold,” Sharekhan observed.