Domestic and overseas opportunities
Fund managers see opportunities for the pharma sector in both domestic and export markets. “Domestic formulations growth is again trending towards a 10 per cent-plus run rate, compared with around 8 per cent compounded annual growth rate (CAGR) over FY22-25,” says Kamal Gada, senior vice president-equity, UTI Asset Management Company (AMC). He adds that consolidation, innovative product launches, better pricing and greater penetration by chronic therapies are acting as tailwinds for India-heavy pharma companies.
The expiry of Novo’s semaglutide patent in India and select international markets has led to day one generic launches (some will happen in the future). “Indian manufacturers are well placed to generate incremental revenue from semaglutide generic launches,” says Gada.
Indian contract research, development and manufacturing organisations (CRDMOs) are positioned to benefit from the opportunity in this segment, which is expected to grow at 13.4 per cent over FY24-FY29.
Supply-chain and production disruptions due to the West Asia war could create shortages. Better-managed generics and active pharmaceutical ingredient (API) companies could benefit from this.
Indian companies are reducing their dependence on the United States (US) market and diversifying into emerging markets.
Rupee depreciation remains a profitability lever for Indian pharma companies with an export-heavy revenue mix.
Hospitals and diagnostics companies are witnessing strong volume growth and gaining market share because of better cost structures.
Overall, fund managers remain constructive on the sector’s prospects. “Healthcare businesses such as India formulations, US exports, non-US exports, diagnostics, hospitals, API and CDMO each have double-digit long-term growth potential,” says Chirag Dagli, fund manager, DSP Mutual Fund.
“The long-term case for the sector is supported by higher allocation by the government to healthcare, rising lifestyle diseases, improved affordability, growing insurance penetration, and export opportunities,” adds Gada.
High crude oil prices remain a key near- to medium-term headwind. “Margins could come under pressure if crude prices remain elevated for longer,” says Gada. Higher crude prices could push up the prices of crucial starting materials, solvents, and intermediates. The war in West Asia has also pushed up freight and insurance costs. These costs could affect profitability in the near to medium term. Rupee depreciation could, however, partly offset the margin pressure arising from these developments.
The high base of Revlimid earnings for larger pharma companies is expected to normalise over the next few quarters.
“Excluding Revlimid earnings, the growth outlook is normal double digits for the India business and high single digits for US business,” says Dagli.
Pharma funds rely heavily on international regulatory approvals, particularly from the United States Food and Drug Administration (USFDA). “A single USFDA warning letter has at times wiped off 15-20 per cent of a company’s stock price within a few days,” says Arvind Rao, founder, Arvind Rao and Associates, a personal finance advisory firm.
Policy changes in the US also affect pharma companies dependent on that market. “Evolving drug-pricing policies such as the Medicare pricing reset in the United States can affect export-oriented companies,” says Abhishek Kumar, Sebi-registered investment adviser and founder, SahajMoney.com.
Tariffs and trade-policy actions can also affect the earnings visibility of Indian pharma exporters. If the rupee bounces back, margins of pharma exporters could be affected.
Rao says pricing controls in the domestic market by the National Pharmaceutical Pricing Authority can also hurt pharma companies.
Kumar points out that investors face high concentration risk in these funds. Fund managers cannot diversify out of pharma and healthcare businesses when these stocks underperform.
Pharma funds suit sophisticated investors with a high risk appetite and a well-diversified core portfolio. “These investors should understand sectoral cycles and be able to withstand high volatility,” says Kumar.
They should first build a core portfolio comprising largecap, flexicap, multicap, midcap and smallcap funds. “Only then should investors take sector-specific bets based on conviction,” says Rao.
Investors should also understand the sector’s nuances. “They should grasp variables such as USFDA approvals, national pricing policy, manufacturing dynamics, API exposure, and US tariff discussions,” says Rao.
Conservative investors, those with low tolerance for prolonged negative returns, and those with a short horizon should avoid these funds.
“Novice investors should also stay away from sectoral bets,” says Kumar.
New investors: Take SIP route
Valuations, according to fund managers, are higher than long-term averages. “Current valuations are around 20-30 per cent higher than historical valuations,” says Gada.
New investors may enter now, but they should do so in a disciplined manner. They should not get swayed by the recent upswing in performance and make a large lump-sum investment. They should ideally use the systematic investment plan (SIP) route to average out their entry costs in these relatively more volatile funds.
Investors should also keep their allocation limited and enter with a sufficiently long horizon.
“Around 10 per cent of an investor’s equity exposure can be allocated to healthcare funds,” says Dagli. Investors entering pharma funds should have a horizon of at least seven years or more, according to Rao.
Existing investors: Check horizon, allocation
Existing investors may continue to hold these funds to capitalise on the current recovery after the challenges of 2025, provided they have a long horizon.
Kumar says investors should add to their holdings only if their total sector exposure remains below 10 per cent. Those who have exceeded this allocation should book partial profits.
Investors approaching their goals may use the recent recovery to exit.