 "mutual funds")
After an 8.6 per cent average decline in 2022, pharma and healthcare funds have rebounded this year. They are up 19 per cent on average year-to-date.
Their underperformance in 2022 can be attributed to a range of factors. “The key reasons were the significant price erosion in the United States (US) generic market and a surge in raw material costs that eroded the margins of pharma companies,” says Chirag Dagli, fund manager, DSP Mutual Fund.
According to Dharmesh Kakkad, fund manager, ICICI Prudential Mutual Fund, the delay in approvals for complex generics also played a part.
“It affected companies whose performance or turnaround hinged on those approvals,” he says.
The high base of last year, a Covid year, also depressed the performance of pharma companies in 2022.
Bounce back
The US generic market’s outlook has improved this year. “Price erosion pressures in the US have bottomed out,” says Kakkad.
New product approvals, which are critical for Indian players, have started to come through.
“The US Food and Drug Administration (FDA), which had stopped physical inspections during Covid, has restarted them, so approvals have started coming,” says Dagli.
Kakkad adds that the base effect has been normalised now.
“Raw material and freight inflation have also eased significantly, aiding margins,” he says.
Opportunities from patent expiries
Large patent expiries over the next five years are expected to expand the generic market significantly.
“Patent expiries in the US should unlock a $140 billion market over the next five years, a threefold increase over what was witnessed between 2017 and 2022,” says Kakkad.
Indian pharma companies currently hold 50 per cent market share in oral solids in the US generic market.
“Now they have started getting approvals for products in the non-oral solids business as well,” says Dagli.
Cost pressures have made manufacturing of generic oral solids increasingly unviable in the Western world, causing many foreign competitors to exit certain product categories.
Kakkad says this is translating into market share gains for Indian players.
Compliance issues
About 90 per cent of the US generic market is controlled by just three wholesalers. This makes it difficult for Indian players to price their products optimally.
Compliance issues also pose a threat.
“Grave observations emanating from USFDA inspections of Indian manufacturing facilities can severely dent Indian companies’ ability to build their business in the US market,” says Kakkad.
Overall, however, fund managers say the US market outlook appears promising.
Domestic market: A long-term growth story
The domestic pharma market is expected to grow at low double digits every year.
“Growth will come both from higher volumes due to improvement in access, diagnosis and optimal treatment of various health conditions. It will also come from access to novel treatment options, which are currently inaccessible to a significant majority of the population due to pricing issues,” says Kakkad.
Dagli informs that many companies are adding to their field force and trying to tap new geographies.
The threat comes from companies with regional focus trying to compete on low pricing. Moreover, volume growth in branded generic formulations is getting cannibalised by trade generics.
Should you invest?
Investing in pharma and healthcare funds can be rewarding. Over the past 10 years, these funds have given an attractive return of 16.1 per cent on average. However, investors need to keep a few points in mind.
They must be prepared for significant drawdowns, as occurred in 2022 (-8.6 per cent) and 2016 (-11.8 per cent).
These funds also carry concentration and regulatory risks.
“The underperformance of a single stock or a group of stocks can have a significant impact on their performance. New regulations can also impact profitability within this heavily regulated sector,” says Viral Bhatt, founder, Money Mantra.
Bhatt warns that investors should not allocate more than 5 per cent of their equity portfolios to a single sectoral fund like pharma and healthcare (and not more than 10 per cent to all sector or thematic funds).
He advises investors to hold these funds for at least five-seven years. Those with low risk tolerance and a short investment horizon, in his view, should avoid these funds.
