Pharma Mutual Funds are sector-specific funds that invest in many pharmaceutical companies.
Due to the increasing population in India, there has been a high demand for medicines and other healthcare facilities, because of which pharma companies earn good profits.
But, being a sector-specific fund, these funds carry a high risk of investment. Therefore, investors who have full knowledge of the healthcare sector are only advised to invest in these funds with a long-term perspective.
How Do Pharma Funds Perform Globally?
Globally, India is the third largest pharmaceutical market in terms of volume. It is expected to grow to USD 55 billion at a CAGR of 15.92% by the year 2020 and at USD 100 billion by 2025.
The long-term growth of the Indian pharma industry looks promising. But, pharmaceutical companies have performed been under stress, particularly companies with high exposure in the US market.
As these companies face headwinds, the pharma stock prices have gone down to nearly 40% over the past three years.
Why are Mutual Fund Companies Investing in Pharma Funds?
Mutual funds are lining up products to invest in pharma stocks.
But why are they doing so?
Simply because, fund managers believe that the shares of this industry are trading cheap, due to their underperformance over the past few years.
The New Fund Offer (NFO) of the schemes, provided bt Mirae Asset Healthcare Fund and ICICI Prudential Pharma Healthcare and Diagnostics (P.H.D) Fund, recently closed its subscription on 25th June 2018 and 9th July 2018.
Whereas, Aditya Birla Sun Life has applied for the same with SEBI. This certain increase in mutual fund NFOs in this sector shows a great growth prospect.
Further, strong products and increasing product launches in the upcoming years by pharma companies will more than counteract the price fall effect.
Why Has The Pharma Sector Gone Down?
The pressure on companies to reduce prices have lead to the downfall of the pharma industry.
With almost all these companies exporting to the US, the regulatory issue has increased and the export has decreased leading to a decline in profits.
Most pharmaceutical companies face hardships due to strict inspections conducted by the US FDA.
Increase in the number of approvals by the US FDA means a fair increase in the competition among pharma companies resulting in lower prices and lower margins.
On the other hand, the increase in approvals by US FDA makes the company fundamentally stronger and more steady in the long run.
Indian pharmaceutical companies were the first to get approvals by the US FDA, but now, new players have emerged in the market who have captured one-third of the total market.
Companies from different countries like Bangladesh, New Zealand, Turkey and Taiwan have got clearance to sell products in USA, which has an adverse affect in the Indian pharma sector.
All these challenges at the same time have reduced the value of pharma stocks in the market. As a result, the pharma sector is a victim of the market, whereas other sectors having higher growth rate and better future prospects.
Due to change in situation and other remedial actions taken by these companies, it is believed that there can be a high chance of recovery.
What Do the Fund Managers Say?
The fund managers and market analysts think that the pharma sector had been trading cheap in the past three years and it will recover soon.
This is being considered as the beginning of the new earning cycle of pharma companies, due to improved efficiency, low base and currency gains.
The healthcare segment can witness multi-year growth and can be one of the fastest growing industries in the country due to rising income levels, increasing health awareness, improvement in treatment technologies and penetration of health insurance.
As the income rises, people tend to opt for superior healthcare services. Though the expenditure on healthcare as a percentage of GDP has been very low, renewed focus of the government on healthcare facilities has put the focus back on healthcare sector.
At current juncture, the pharma story is an interesting theme, given the attractive valuations and defensive play embedded in the sector.
“Also, the concerns surrounding the sector are getting sorted one-by-one. Additionally, in recent years there has been an expansion in the investible universe of the healthcare itself” says the fund manager of ICICI Prudential PHD Fund.
Will the Issue be Curbed?
Regarding FDA issues, the problems have been factored in by the market as these concerns are being addressed systematically.
The rise in FDA plant resolutions and product approvals are likely to lead a recovery in US business.
Moreover, the US policy relating to high medicine is for patented drug and Indian companies are majorly into generic medicine. Hence, there will not be a major impact on the India pharmaceutical companies by the US pricing policy.
The financial reports of pharma companies shows a healthy generation of operating cash flows and a good pipeline of generic products have reinforced the belief of fund managers in this sector.
“In the given market scenario and based on risk appetite, the investors can consider a lump sum with staggered allocations through SIP or STP modes in the pharma sector” said Sailesh Raj Bhan, Deputy CIO, Reliance Mutual Fund.
Hence, on the whole, the analysts see a possibility of growth in the pharma and healthcare sector and consider it as a superior earning opportunity. Some of the mutual fund NFOs in the healthcare sector recently proves the growing interest of analysts.
A Brief Study on Pharma Mutual Funds
1.Reliance Pharma Fund
The primary investment objective of Reliance Pharma Fund is to generate consistent returns by investing in equity and equity related or fixed income securities of pharma and other associated companies.
It is the best pharma sector mutual fund in the present scenario which had managed to provide an average return during the downfall of the sector.
2.SBI Healthcare Opportunities Fund
SBI Healthcare Opportunities Fund provides the investor maximum growth opportunity through equity investments in stocks of growth-oriented companies in the sector.
From a long-term perspective, this fund has shown a positive return but due to the hardships in the pharma sector the returns were a bit fluctuating.
3.Mirae Asset Healthcare Fund
Mirae Asset Healthcare Fund will invest at least 80 percent of the corpus in pharma, healthcare and allied sectors.
As per scheme documents, the fund aims to identify companies with high returns on equity and will follow a concentrated portfolio of 30 to 40 stocks.
4.ICICI Prudential Pharma Healthcare and Diagnostic (P.H.D) Fund
ICICI Prudential Pharma Healthcare and Diagnostic (P.H.D) Fund can help investors participate in core non-discretionary healthcare sectors by investing in the pharmaceuticals, hospitals, diagnostics, preventives, health insurance and allied sectors.
Thus, sophisticated investors with intimate knowledge about the sector and with a high-risk appetite can invest in these sector mutual funds.
Though pharma and healthcare sectors have a high probability to provide good returns, it might take a few years.
Disclaimer: The views expressed in this post are that of the author and not those of Groww
Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.