Pharma Funds: An opportunity for patient medium-term investors

Best of the opportunities in the world of investments come in the worst of the times. Pharma and healthcare funds are at a critical point. Keep aside the CY 2020 when they did well, and you will find these schemes underperforming most other sectors since CY2016. Since the beginning of CY2022 these schemes on the average have lost 9.8%, according to Value Research. If there is so much pessimism around, then why would someone consider investments in these sector-specific schemes? Let us understand why one can consider investing in pharma funds in the medium-term:

The key challenges in the pharmaceuticals sector include price pressure in key markets such as the US, tough regulatory regime in the US, inflation and extreme competition affecting margins in some segments. While little can be done about the pricing pressure and low margins in the US and tough regulatory environment, the other two may soon see some respite. Inflation is perceived to be peaked out. For pharma companies, it is relatively easy to pass on the inflation as the end consumer cannot postpone healthcare needs. Though this pass through of costs happens with a lag, rarely they reverse. As inflation comes down gradually, prices are here to stay and are expected to aid pharma companies’ margins. In businesses such as diagnostics competition has intensified due to entry of new players. However, as interest rates rise, it will force companies to focus on bottomline than just grabbing market share.

Increased product filings in the US and other markets should ensure that export-focused businesses keep growing, despite margin’s pressure. The real growth drivers however are local. Branded generics are expected to drive bottomline for many companies in India. Indian manufacturing standards are high, despite low cost structures. Branded generics offer better margins to manufacturers and allow them to also pass on cost increases quickly to the end consumer. Consumer’s preference for premium products also percolates into the area of medicines when consumers prefer to buy a brand over a generic medicine. Many of us prefer to buy a Crocin or a Paracip over a Paracetamol. The latter is the generic name of the medicine while the former two are the brands. It is like purchasing Saffola or Fortune Sunflower Oil over loose sunflower oil.

In the coming months, medical tourism, increased health insurance purchases, rising awareness post covid19, will ensure that the demand for quality healthcare will rise. This paves way for diagnostics chain businesses and healthcare solution providers including hospitals. Though this is a sectoral fund, underlying sub-segments offer some diversity. US-focused unbranded generics, India-focused branded generics, hospitals, diagnostics, health insurance companies, intermediates manufacturing such as active pharma ingredients, biosimilars, contract manufacturing & research are some such segments. This ensures that a savvy investor can spread her bets on best-managed companies.

Right businesses at the right price decide the future returns for most investment portfolios. Though valuations on index levels may not appear cheap compared to what they were a year ago, there are pockets of opportunities in the pharmaceuticals sector. Also using traditional Price to Earnings ratio (P/E) or Price to Book ratio P/B to assess all these companies may not work. Some of these companies are at the cusp of a long path of growth in earnings.

For most retail investors, it is difficult to understand pharma and healthcare business due to lack of understanding and curiosity of scientific knowledge. Hence, actively managed dedicated mutual fund schemes can do the wonder. There are 16 healthcare focused mutual fund schemes. Out of these six are passively-managed schemes. It is better to take an actively-managed equity fund route if you are keen on pharma sector exposure. Some of you may wonder if your existing investments in diversified funds offer you exposure to the healthcare sector. It does. As per value research, on an average 6% of the money invested in flexi-cap funds was invested in healthcare stocks as on August 31, 2022. If you think you want to invest more in this crucial sector then do consider investing in a well-managed healthcare fund. Active schemes of Mirae, ICICI and SBI can be considered for this purpose.

In a sector fund you have to get both entry and exit right to make money. This can be a good time to start deploying your money in a healthcare fund. Use the next three months to complete this investment. The ideal time frame for this investment is at least three years.