Pharma funds remain in poor health amid headwinds on compliance

Despite hopes of a revival last year, pharma funds remain laggards among sectoral funds amid headwinds on the compliance and pricing front in the US.

Pharma funds have shed 5.1 per cent during the last three months and have declined 2.4 per cent in a year. Fund houses such as ICICI Prudential, DSP, IDBI and Mirae Asset have launched their pharma and healthcare fund offerings over the past year, expecting a change in fortunes.

Aditya Birla Sun Life is the latest entrant, with the offering of its pharma and healthcare fund closing on Wednesday.

Pharma stocks had rallied briefly in the second quarter last year, on the back of the rupee’s depreciation and an easing regulatory environment in the US. However, the lack of meaningful new approvals, price erosion, and certain regulatory challenges remain an overhang on profitability and growth outlook.

The Sensex has risen 12 per cent, while the BSE Healthcare Index has fallen 10 per cent in the last one year.

India’s pharma industry remains broadly impacted by the American and Indian market dynamics, with both having seen divergent trends, according to IDFC Securities. Although India has had its share of challenges due to price controls and GST implementation, it has otherwise been reasonably steady.

“Despite strong franchises, Indian pharma firms have been unsuccessful at leveraging the positive investor sentiment towards strong domestic consumption business models, given the negative news flow from the US. These have been trading at sharp discounts to healthcare B2C business models like diagnostic chains and pharma MNCs,” the note observed.

Some experts say the sector is on a recovery path and this may be a good time for investors to start investing in such funds. Industry players hope the Union Budget will include a few sops to the sector.

“The sector is seeing a revival after the challenges arising from demonetisation and GST. Companies have taken efforts to cut costs and rejig R&D spends; we can expect earnings growth of 12-15 per cent on a low base,” said Shailesh Bhan, deputy CIO (equities), Reliance MF.

According to an ICRA report, growth is likely to remain at 11-13 per cent in FY20 on healthy demand from the domestic market, given the increasing spend on healthcare, along with improving access.

“The moderation in pricing pressure for the US market, new launches and market share gains for existing products and consolidation benefits will drive growth in FY20. The growth will, however, be constrained due to regulatory interventions such as price controls, compulsory genericisation, and the US FDA’s oversight for manufacturing deficiencies,” the report observed.  

IDFC Securities, however, has said investors may not realise the full valuation potential of the strong domestic formulation franchises, as structural challenges in the US may not wither soon.