Will the rally in pharma mutual funds continue?

Pharma sector mutual funds have delivered over 60% returns in the last one year. These funds have been enjoying their spot under the sun since the covid-19 crisis struck the globe. Many new investors have been interested in these funds in the last one year. Shivani Bazaz of ETMutualFunds.com spoke to Chirag Dagli of DSP Mutual Fund to understand the outlook of these schemes and the pharma sector. Edited interview. Pharmaceutical sector has been a hot sector ever since covid started showing in the country. The new wave and increased medical spending likely support the sector. What is your view?The making of an upturn in Pharma possibly started in Mid FY20 when big majors started to cut down on R&D spends and Capex. Major generic companies had spent 2.5x more in FY16-20 on R&D and Capex v/s FY11-15. So a lot of investment has already gone in and next few years is the time to reap benefits of these investments. Hence the outlook is good.Covid has benefitted some companies and segments in therapeutic products, diagnostics services, hospitals and Vaccines. In therapeutics there have been various opportunities of both re-purposed drugs as well as new drugs. But the opportunity for therapeutic drugs will be highly dependent on case load. We have seen these sales fall off in Jan / Feb before the 2nd wave started. Clearly a lot of these sales are not sustainable at these elevated levels. While diagnostics and hospitals gained incremental business from Covid, they have also seen impact on the non-covid business which suffered due to lower patients footfalls. Similarly acute care business suffered due to lower patient footfalls and lower disease incidence through lockdowns. Vaccines has some opportunity for a few companies in terms of manufacturing and distribution. Sustainability of vaccine revenues is not a given. I would not like to position portfolio towards Covid. Investors have been extremely bullish on the sector. What would be your advice to them? Getting similar returns as past 12 months over the next 12 months is statistically a low probability. It can happen to a stock but unlikely to a broad portfolio. It would be prudent to not have such return expectations for the future. That said I am sanguine of the LT potential of the HC sector. This is one of the few sectors that offers exposure to a wide variety of businesses that are non-cyclical and have different drivers. Pharma had a lean phase for almost four years. Are those troubled years over for the industry?FY15-19 were difficult years for the HC sector as evident in the BSE Healthcare index’s underperformance v/s the BSE Sensex. It was more driven by downward pricing cycle in the US generics sector. The US generics market saw the no of customers shrink form more than 8 to 3. These 3 have combined purchasing power of 90% of the market. Further consolidation may not pass regulatory scrutiny. As such US generics is at an interesting stage currently as Indian companies are set to benefit from the huge opportunity in complex generics. Other segments in HC like India formulations, APIs, Pathology, Hospitals are all doing well. Thus I am sanguine of the outlook on the sector. I am also excited about our international companies exposure which currently stands at 10% of the fund AUMIf one looks at long term performance of the BSE HC index there are only 2 times when the HC sector has underperformed the market for more than 2-3 years. Once was in FY15-19 That we discussed above and other time was in Fy05-07 pre GFC when there was a broad based rally in the market.Can retail investors bet on Pharma in the coming days or should they tread cautiously?While we club everything as Healthcare there are distinct businesses within the Healthcare sector each of which have different drivers. There are pockets of over valuation in certain segments which we need to navigate. Equally there are pockets of opportunities. So I feel the risks and rewards are balanced. Investors are becoming increasingly open to take the extra risk and invest in sector funds like Pharma funds. How do you view the trend? Unlike other sectoral funds, Healthcare is a diverse theme with different segments that we discussed earlier. The drivers of each of these segments are different and it is difficult to envisage a scenario where all of these sub-segments will not do well. Thus I believe one should focus on allocation of 5-10% of equity exposure to a Healthcare fund for long term capital allocation. This allocation should not be based on the recent performance of the sector.

from Economic Times https://ift.tt/2SPu5aw