Pharma & Healthcare Sector – Time to Overweight !
At current levels (Nifty pharma index around 11,700), we are overweighting Pharma and Healthcare sector and the rationale for the same are outlined below.
After the spectacular post COVID rally, this sector has gone nowhere for the past two years. If at all, it has drifted downwards only. As such the earning multiples have compressed to attractive levels.
In this context, it will be important to understand what could be the possible triggers for the sector to rerate in the short term. At the same time, also to understand, the key drivers of valuation & growth, in the medium to long term.
In the immediate terms it is highly probable, that the simple generics space, witnesses a strong cyclical bounce. As there is no entry barrier in this segment, it has seen fierce competitions building up over the last 5 to 6 years, leading to serous erosion in price. In fact some of the global players like Mylan & Teva have closed down production lines as they are no more profitable. The hypothesis is that as supply reduces, price will normalise.
In the medium to long term, the key drivers of growth for the Indian pharma and healthcare sector will be
a) Branded business in India, that will continue to demonstrate, consistent 10/11% growth, as rural India gets integrated into the mainstream.
b) Complex Generics market in USA: Indian companies are gaining foothold in this segment, for instance Aurobindo in injectables, Cipla in inhalers etc., For sure this segment offers significant growth opportunity in the coming years.
c) Contract Research & Manufacturing is another exciting opportunity (over 100 bn USD). Herein, the Indian companies support the innovators, like Merck Pfizer, Sanofi etc., in their entire life cycle of drug discovery. For instance Syngene helps with Research and companies like Divis, Lauras lab, Suven, provide manufacturing support not only in the clinical trial stage but also when the molecule is successfully launched.
d) Diagnostic companies too are available at much more reasonable valuation now, as they have seen serious threat form the new age companies such as 1MG. However they offer attractive levels to enter now.
e) Speciality/ Biosimilars – – As of now, we are not betting on either the specialty segment or the Biosimilars, despite Sun Pharma gaining significant traction in the specialty segment & BioCon some success in the Biosimilars area. While speciality segment requires large investments, implementation of interchangeability norms will be crucial, for Indian companies, to gain traction in Biosimilar segment.
To recapitulate it is a good time to add to Pharma & Healthcare exposure and the best way to take exposure is through mutual funds route that minimises risk and yet enables participating in the growth story that this segment offers.