Pharma-focussed MFs offer good potential

Market share of Indian pharma cos in US has gone up from 16% in 2008 to 23% now 

Of the various funds, we discussed in this section, sectorial funds are quite different and yet could be very opportunistic. Sectorial funds are those which invest in a specific sector of the economy. The specificity brings in opportunity at the same time huge risk as it leads to concentrated portfolio. An exposure to a performing sector would provide a desired additional alpha to the portfolio. This is the reason why any sectorial fund should be restricted to a small proportion of the portfolio to avoid huge losses. 

Pharma & Healthcare funds are those funds which invest in equity and equity-oriented securities of predominantly pharmaceutical companies and their allied businesses. Currently, in India, there is dearth of listed companies which are purely in health care business like hospitals, diagnostics and healthcare services. So, despite the tag of healthcare in the fund names, most of these are pharma funds for now. 

The generics space has been a big growth driver for Indian pharma companies and especially from the US which has remained a prominent contributor for all the companies operating in India. US is the world’s largest market for generic medicines and Indian companies have successfully penetrated there. The market share has been on a constant raise from 16 per cent in 2008 to about 23 per cent currently. The Indian pharma companies have clocked an astonishing growth rates of upwards of 30 per cent for the period of 2009 to 2014 resulting in improved valuations for the entire sector. The US market now accounts for over a third of the Indian pharma companies. 

The US also imposes some of the stringent regulations for importing pharmaceuticals. The US Food & Drug Administration (USFDA) conducts regular checks in the manufacturing facilities and issues warnings if the measures are not met. The earlier US administration in its bid to democratize and reduce the healthcare costs has launched the Obamacare which were thought to reduce the margins of these companies. The stock prices started to correct in anticipation of the pressured margins. 

With the new US administration in place and calling for local manufacturing (not just in this sector) has sent shock waves to the stock markets. The Trump policies have imposed further restrictions on imports as a whole and also series of warnings were issued across the Indian facilities belonging to various companies. This has led to fall in earnings and the sector seemed to be in distress in the last three years. The USFDA observations take months to resolve and a few quarters to be corrected to get back to normalcy. 

With few or lesser such warnings in the last year and clearing of the older observations by these companies, the tide seems to be turning back in favor of Indian pharma. Technically, the index seems to have hit the bottom and is on a trend reversal. Moreover, the past bull year has helped the allied services business of healthcare and diagnostics to be listed and paved way for further float (of public stock). This liquidity along with the changing macros (with depreciating rupee - is a positive for exporters) is causing tailwinds for the sector as a whole. The softening of stand by the new administration on the drug price control has also aided the mood. 

This has caught attention of the investors and the fund houses alike. ICICI Pru also launched an open-ended scheme in this category. The fund named as PHD i.e Pharma Healthcare and Diagnostics is attempting to chart a new territory by planning to invest in the listed health insurance companies. Though, the current availability is limited they see an opportunity in this line of business in future. 

Reliance pharma fund is the pioneer in this category with a consistent performance over the 3 to 5-year period. The other options are from SBI healthcare, UTI healthcare, TATA healthcare and the recent offering by Mirae Asset.  Though, this sector is considered as defensive and all-weather, one has to be conscious of the fact that it’s one of the most regulated sector across the world. This sector is also prone to systemic risk as government interventions is high. The impact of the recent announcement of National Health Protection Scheme by the Indian PM needs to be seen. 

(The author is a co-founder of “Wealocity”, a wealth management firm and could be reached at knk@wealocity.com) 

K Naresh Kumar