Pharma and health care funds: Defensive bets amid growing volatility

The pharmaceutical sector has been attracting strong investor interest. Pharma funds have delivered an average return of 6.5 per cent over the past three months and 54.6 per cent over the past year. Investors are drawn to the pharma sector for its robust business prospects and defensive qualities.

 

Pharma, which has several sub-segments, offers broad diversification. “Pharma funds provide ample diversification opportunities with investments across branded pharma (comparable to FMCG), US generics (comparable to commodities), APIs (or Active Pharmaceutical Ingredient, comparable to manufacturing), and hospitals & diagnostics (comparable to retail/premiumisation),” says Meeta Shetty, fund manager, Tata Mutual Fund.

 

Altogether, 26 funds focused on pharma and healthcare collectively manage Rs 30,306 crore. Some of them offer exposure to global pharma stocks.

 

 

Big growth runway

 

Indian pharma companies are expanding beyond the US to emerging economies and Europe, solidifying India’s position as the pharmacy to the globe. “India accounts for over 45 per cent of the US generic market. Private hospitals have a long growth runway, as the largest hospital in India has less than 1 per cent of the country’s bed capacity. Many of these franchises could grow at a 15 per cent compounded annual growth rate for over a decade,” says Mahesh Patil, chief investment officer, Aditya Birla Sun Life Asset Management Company (AMC). 

 

Production-linked incentives are expected to enhance capacity, boost exports, and lead to import substitution. Rising income is fuelling the demand for quality healthcare. “Segments like hospitals and diagnostics are highly underpenetrated and offer significant growth potential. Healthcare is a structural growth story backed by rising medical expenditures as GDP increases,” adds Shetty.

 

The recent surge

 

The US Biosecure Act is likely to benefit Indian contract development and manufacturing organisations (CDMOs). “CDMO has seen a re-rating due to expectations of improved business traction led by the implementation of the US Biosecure Act, which encourages developed market innovator companies to explore China + 1 opportunities with Indian players,” says Patil.

 

Healthcare sector M&A deals are on the rise. A Grant Thornton Bharat report reveals 55 deals worth $4.1 billion in Q2 calendar year 2024 by the Indian pharma and healthcare sector, up 49 per cent over the same period last year.

 

Elevated valuations have made investors go for pharma, a defensive sector. “The defensive nature of healthcare earnings, which are less impacted by global economic cycles, adds resilience to this sector,” says Dharmesh Kakkad, fund manager, ICICI Prudential Mutual Fund.

 

Beware of the risks

 

Risks to that sector include regulatory actions by the US Food and Drug Administration (FDA) and price control pressures from the Indian authorities, which could affect profitability. Foreign pharma giants may also favour launching blockbuster products through privately-owned companies over listed subsidiaries. “Any global event which disrupts the supply chain could impact earnings of pharma stocks. Additionally, significant capex plans, particularly by hospitals, could weigh on near-term profitability until the new beds achieve reasonable occupancy,” says Shetty.

 

Investors also face concentration risk in sectoral funds.

 

Long-term bets

 

Pharma funds suit seasoned, long-term investors. First-time investors may be better off focusing on building their core portfolio with diversified equity funds. “A long-term investor with a 4-5-year horizon could invest in this theme via SIPs,” says Patil.

 

Allocate 10-15 per cent of the total equity portfolio to sectoral and thematic funds like pharma. “Such an approach allows investors to benefit from a sector’s growth potential without incurring excessive concentration risk,” says Kakkad.