Pharma funds make a comeback; now rises 17.3% for a one-year period

The rally in pharmaceutical stocks owing to the rupee depreciation and easing regulatory environment in the US has boosted the returns of mutual fund (MF) schemes that invest in this sector.

Pharma funds, which had been laggards for many months now, are now up 17.3 per cent for a one-year period, outperforming infrastructure and banking funds that gave returns of 2.3 per cent and 9.8 per cent, respectively, show data from Value Research. The benchmark BSE Sensex has returned 22 per cent, while the BSE Healthcare index has surged 16.5 per cent in the last one year.

Sun Pharma, Divi’s Laboratories and Cipla are the stocks in the pharma pack that have hit their respective new highs in the last week. The first two have rallied 15 per cent and 13.5 per cent, respectively in the past month.

With the exception of the last few months, pharma stocks had been beaten down badly. Analysts attribute this to high valuations, the Food and Drug Administration (FDA)-related challenges and the implementation of the goods and services tax (GST) which impacted domestic growth last year.

Earnings of US-focused Indian pharma companies had dropped 30 per cent year-on-year in 2017-18 on the back of regulatory clampdowns, channel consolidation in the US and increased competition. Absence of niche product launches in the US was a key reason why Indian companies did not perform well between 2015 and 2018. However, with earnings bottoming out, analysts believe 2018-19 may be a better year for pharma companies.  

“We may see a gradual comeback for large-cap pharma companies driven by actual and likely regulatory resolutions, moderating price erosion and product launches across generic and speciality categories in 2HFY19,” stated a recent report by HDFC Securities.

Attractive valuations have spurred fund houses to launch new funds in this category as well. Mirae Asset Healthcare Fund and ICICI Prudential Pharma Healthcare and Diagnostics (PHD) Fund are the two funds launched recently.

Analysts also see the US-based business revenue run rate stabilising across companies over the next few quarters although the recovery is likely to be more gradual. “While the structural overhang on the industry may remain, the decline in cyclical pressure could help companies readjust their cost bases and buy time for reorienting overall business models,” said a note put out by brokerage Emkay.

“The pressure of the US FDA has reduced because a lot of companies have got plant approvals. The only challenge that remains is the US pricing environment, which has also stabilised,” said Sailesh Bhan, deputy CIO - equity, Reliance MF. “The sector had become disproportionately cheaper relative to the market which is the reason for the comeback. Going forward, the focus will be on the earnings growth recovery, which is likely to happen over the next two-three years.”