Should you invest in Pharma now ?

After being neglected for last three years, Pharma has come out of doldrums in the ongoing market turmoil.

According to ICRA report, Indian Pharma is expected to grow by 10-12% till 2021-22. With Nifty one year return at -16.24% and all sectoral indices in red, Pharma has given positive one year return of 22.05%(as on 12th June), thus surpassing index by 38.29%.

This outperformance has led to general belief of the sector as a safety bait and many are looking for fresh exposure or raising existing exposure either directly by purchasing shares or through sectoral funds. But the questions are-

Is it the right time to invest in Pharma? Is more value left there in pharma? If yes, should one invest through sectoral funds or equities?

Let's unfold these questions

DRIVING FACTORS

• USFDA Approvals:- US is the biggest importer of Indian drugs and meets its 50% of generic drug requirements from Indian exports. In 2019, US FDA approved 336 ANDA(Abbreviated New Drug Application) as compared to 290 in 2018. Moreover, drug shortages around the world due to Covid-19 are leading to speedy US FDA clearance of manufacturing facilities of companies like Lupin, Dr. Reddy Labs, Biocon ,etc.

• Expiry of patents of foreign companies:- $250 billion of patents are expected to expire between 2018 and 2024(as per a study by Evaluate Pharma), representing a huge opportunity for Indian generics Industry.

• Increasing portfolio of Speciality Drugs:- India is the largest producer of generic drugs. However, many companies ,like Sun Pharma, have prime focus on complex or speciality drugs due to severe competition in generic drugs segment from other countries. Speciality drugs put companies on position to charge premium and thus lead to improved profitability .

• Depreciating currency:- When currency depreciates, it gives an advantageous position to Indian exporters as their products become cheaper in dollar terms, thereby leading to volume growth.

• Consolidation:- In recent years, many domestic companies have made their way to merger or acquisition. E.g. Sun Pharmaceutical Industries has entered into an agreement with Switzerland-based Novartis, to acquire the latter’s branded cancer drug Odom zo.

• Stable Domestic Growth:- Covid-19 is expected to make government spend more on healthcare infrastructure and facilities. At the same time, people are also getting more aware of the need for proper medication, with increasing accessibility and affordability.

• An opportunity to foray into API segment:- According to Trade Promotion Council of India, India imports 70% of API from China. Due to emergence of novel coronavirus, API production and supply from China to other countries has been hampered. Given that, Indian Govt. has set aside $1.2billion to foster API manufacturing in the country and to evolve India as a hub of API supply for the global markets in the future.

Valuations(as on June 14th 2020)

• P/E Ratio- Nifty Pharma is valued at P/E of 30.56 which is at 27.8% premium to Nifty 50 (P/E:- 23.90) and such a premium is normal. Moreover, the current P/E of 30.56 is below its 5-year average of 44.64.

• P/B Ratio:- Nifty Pharma is currently trading at P/B ratio of 3.8 which is moderate for the sector. Its one year average P/B ratio is 3.21 which is below current level(3.8) and five year average P/B Ratio is 4.82 which is well above 3.8.

What should you do ?

Given current valuations and the earnings expected to revive due to shift to complex drugs,biosimilars, huge potential for API, stabilizing USFDA inspections, exploring business opportunities in untapped geographies like Eastern Europe, Russia, Africa, etc. and stable domestic market growth, the sector is expected to give good returns for the next two years (20-50%).

You may consider increasing your exposure in Pharma sector if you are bullish on it.

There are two primary ways to do so:-

1)Investing directly through Equity shares.

2)Investing through Sectoral Funds (A kind of mutual fund that invest in specific sector companies)

However, it is advisable for retail investors to take position of not more than 5-15% in any specific sector since any sudden adverse change can lead to drastic erosion of their funds.

A better option would be to invest through multi cap funds(you may choose one with higher % share to pharma) with portfolio comprising of companies of different market cap and several sectors which would lead to better risk management.

With full modesty and smile

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Disclaimer:- The post should not be considered as a recommendation. It is advised that you make necessary market research and then take your investment decisions.