Pharma a Big Op­por­tu­nity, Will Last for Many Years

The Economic Times - - Money -

In­vestors need to bring down their re­turn ex­pec­ta­tions from pharma stocks to 15% from 20-25% clocked in the last five years, said Sailesh Bhan, deputy chief in­vest­ment of­fi­cer, Re­liance Mu­tual Fund. In an in­ter­view to Prashant Mahesh, Bhan, who man­ages the fund house’s pharma scheme, said pharma com­pa­nies need to be care­ful in ac­qui­si­tions. Edited ex­cerpts:

The health­care index is down by 10.61% since the start of the year, against the Sen­sex which has lost 3%. What is the rea­son for this un­der­per­for­mance? A cou­ple of things have hap­pened since 2008. The weight of the sec­tor in the Sen­sex which used to be 3% has moved up to 12%. This jour­ney has given huge re­turns to in­vestors and re­flects the out­per­for­mance of this sec­tor. Today, there is sig­nif­i­cant and mean­ing­ful own­er­ship in this sec­tor, while com­pet­ing sec­tors have seen ero­sion in own­er­ship.

Strong re­turns in the last 4-5 years have cre­ated a high mul­ti­ple base for a lot of com­pa­nies and the mar­kets are pric­ing in their abil­ity to re­peat that kind of growth. This ap­pears chal­leng­ing, which has led to a de­r­at­ing of the sec­tor, es­pe­cially for com­pa­nies which are ori­ented to in­ter­na­tional mar­kets. Earn­ings outlook has slowed down on the in­ter­na­tional side, due to reg­u­la­tory rea­sons where ap­provals are slow or sim­ply due to the fact that the base is large for them to rapidly grow in in­ter­na­tional mar­kets, un­less you have an ex­ist­ing port­fo­lio.

How­ever, the stock price cor­rec­tion seems to be over and now they should con­sol­i­date at these lev­els. From here on, in­vestors should bring down re­turn ex­pec­ta­tions to 15%, com­pared to the 20-25% they got ear­lier.

USFDA’s ob­ser­va­tions on plants of var­i­ous In­dian pharma firms has been one of the main rea­sons for the fall in stock prices. Are in­vestors read­ing too much into it? FDA ob­ser­va­tions are nor­mal in most cases. The prob­lem arises if these are re­peated and if they have got any­thing to do with data in­tegrity. Ev­ery let­ter is­sued by the FDA to a com­pany is not the same. Since in­vestors do not have con­tent of the let­ter at the time of news­flow, it is per­ceived as a sig­nif­i­cant neg­a­tive, which of­ten leads to a sharp cor­rec­tion in price.

In a lot of cases, good In­dian com­pa­nies will come out of it strongly since their pro­cesses are strong and they will take one more step to take the com­pli­ance level higher. It is a co­in­ci­dence that all these FDA is­sues have come to­gether, which makes in­vestors feel this will keep on hap­pen­ing.

PHARMA PROMIS­ING

The health min­istry has banned sale and man­u­fac­tur­ing of 344 fixed dose com­bi­na­tions? How will this af­fect pharma com­pa­nies? In­dus­try data sug­gests 1-3% of turnover comes from this cat­e­gory. The im­pact may not be sig­nif­i­cant on an in­dus­try-wide ba­sis. How­ever, there could be com­pany spe­cific is­sues.

Do you pre­fer In­dian pharma firms where val­u­a­tions are cheap or MNCs at ex­pen­sive val­u­a­tions? It’s more about the busi­ness of the com­pany rather than own­er­ship. While eval­u­at­ing a com­pany you look at the busi­ness, distri­bu­tion, ca­pa­bil­ity and ad­van­tage that it has.

For ex­am­ple, in the do­mes­tic mar­ket, there is an un­lim­ited op­por­tu­nity for good com­pa­nies. The mar­ket op­por­tu­nity will last for many years to come and be it In­dian or MNC, the do­mes­tic pharma in­dus­try is just be­ing born. Cost of medicine is not high in In­dia when com­pared to in­comes and as aware­ness and de­tec­tion in­creases, the mar­ket will only grow.

Sun Pharma re­cently ac­quired 14 pre­scrip­tion brands in Ja­pan, while Bio­con got ap­proval for in­sulin glargine in the coun­try... Ten years ago, In­dian com­pa­nies did not have scale to ac­quire. Now that they have been suc­cess­ful and have cre­ated cash in busi­ness, they can add on to their port­fo­lio. Ac­qui­si­tions are way to go as they cut down en­try time to new mar­kets. The sec­tor has seen high M&A ac­tiv­ity in last few years and pric­ing is not cheap. So, com­pa­nies need to be care­ful while go­ing for ac­qui­si­tions.

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