Virus ignites investment appeal of pharma firms

Indian drugmakers are on track to become a staple investment for some equity investors after being spurned for at least five years.

The S&P BSE Healthcare Index has risen 27 per cent this year and is set for its first yearly outperformance in five years versus the S&P BSE Sensex Index.

The benchmark gauge has just one pharmaceutical member, Sun Pharmaceutical Ltd. That means the Sensex was unable to benefit from a stellar rally in some of the largest drugmakers.

"Improving fundamentals and the potential for Covid-19-led risk off in other sectors will keep the pharma rally going" said Aneesh Srivastava, the Mumbai-based chief investment officer at Star Health and Allied Insurance Co. The odds for better returns over the next few years have risen, he said.

A flurry of plant approvals from the US Food and Drug Administration this year has boosted the fortunes of Indian pharma companies, while domestic drug sales have recovered after the world's biggest lockdown eased in June. On Monday, the government unveiled a policy aimed at boosting local output of raw materials used in drug production to break a reliance on China, which supplies about 70 per cent of those ingredients.

"These steps come at an opportune time," Emkay Global Financial Services Ltd analyst Praful Bohra wrote in a note. A lot of companies globally are looking for "an alternate source of raw materials to reduce their dependence on China," he said.

The optimism is reflected in analyst earnings estimates for the sector. Forecast profits for members of the local healthcare index have rebounded to pre-pandemic levels whereas that for the benchmark has slumped to near its lowest since 2017, according to data compiled by Bloomberg.

"Pharma stocks can command a higher weight in the indexes and portfolios as India is set to become an even stronger hub for drugs," said Deven Choksey, managing director at KRChoksey Investment Managers. He sees the stocks adding as much as 20 per cent to their rally by the end of this year.

With only the one stock remaining, the industry's weighting in Sensex has dropped to about 1.2 per cent, the lowest level since 2011 as sentiment for the shares soured after several major Indian pharma companies were hit by a wave of FDA sanctions in 2015 that threatened access to the profitable US market. Things have since changed.

Still, US President Donald Trump announced new policies on Friday aimed at lowering drug prices that can have repercussions for India's generic drugmakers.

"Growth in the sector is rebounding as the economy is opening up," Abdulkader Puranwala, an analyst at Anand Rathi Financial Services Ltd wrote in a recent note.

"We expect pharma to be one of the fastest growing industries in India," as shown by the price increases and new product launches, the note said.