pharmaceutical funds: is it time to invest in pharmaceutical funds to play against the tide?

Contrarian investors looking for a sector bet after the sharp rise in broader markets can consider pharmaceutical stocks, which have underperformed of late, according to fund managers and analysts. As several pharmaceutical companies continue to face profitability pressures, their stock valuations are cheaper, they said. Investors unsure of which stocks to choose might consider mutual funds that invest in pharmaceutical stocks.

Over the past year, the Nifty Pharma index has lost 12.4% against the 1% gains of the benchmark Nifty 50 index. Mutual funds that bet on pharmaceutical stocks have fallen 14.2 % on average over the past year. So far in 2022, they’ve fallen 12.4% on average, according to Value Research.

Fund managers said the underperformance has softened valuations for the sector.

Although the estimated price-earnings (PE) ratio – a popular valuation measure – is 22.5 times – in line with the 10-year average, its premium to the broader market has declined.

“The premium over the broad BSE 100 index has fallen to 13% from an average of 34% over the past 10 years,” said Vrijesh Kasera, equity fund manager – Mirae Asset Investment Managers.

Fund managers said investors could stagger their bets in the sector over the next three to six months as pressure on their earnings has yet to ease.

“After a lull in 2020, US generics have started to come under increased pricing pressure. Large companies continue to have problems with the USFDA,” Kasera said.

With inflation expected to remain elevated globally, fund managers believe companies in this sector are in a much better position to pass on rising costs to consumers and can maintain margins.

“Companies in the generics and branded hospitals sector which make up a third of the healthcare index performed well. However, the other three segments of the index, namely APIs, unbranded generics and diagnostics space, which make up the balance of two-thirds of the underperforming weight due to strong competition, pricing pressure and rising raw material costs,” said Aditya Khemka, manager of fund, InCred PMS, which manages a healthcare fund.

Branded generics, hospitals and diagnostics and APIs could see margin pressures ease due to a decline in commodity prices from their peak.

Fund managers believe medical tourism is returning to normal and companies have begun to communicate that pressure in the US has largely normalized.

Khemka believes a recovery in medical tourism following Covid relaxations across the world is likely to boost hospital margins. Branded generics could fare well as pressure on commodity prices eases and brands gain pricing power, although concerns remain over US generics.

Financial planners have said investors could allocate 5-10% of their equity portfolios to the pharmaceutical sector. “Pharmaceutical companies are cash positive with the ability to pass on rising costs and are less impacted in an inflationary environment as procurement is unlikely to be postponed,” said Rupesh Bhansali, Head (Distribution) of GEPL. Capital.


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