The recent unfortunate outbreak of the pandemic Covid19 would impact the pharma industry positively

The pharma sector has been underperforming for the last 5 years, but pharma stocks have made a smart recovery in the last 6 months (Nifty Pharma index has given 14% return). For the benefit of retail investors, please explain the reasons behind the turnaround in pharma?

We have continued to maintain that the Pharmaceutical industry is a secular industry and thus would continue to attract investor interest. Over the last 5 years as you know it has been facing a lot of headwinds from both the domestic and their main export market, which has exerted pressure on growth and profitability of the industry immensely, thus impacting the investment attractiveness of the industry. However, if we look at the aggregate revenues for US revenues market for the last 6-7 quarters, there has been an average growth of ~8%, furthermore the domestic market has also returned back to double digit growth (~12%) from the single digit growth (~8%) seen in the prior years, both of these tailwinds along with the industry focus on return on invested capital has had a positive impact on the industry profitability.

What is your near to medium term outlook on the pharma and healthcare sector in light of the outbreak of COVID-19 pandemic?

We expect that the recent unfortunate outbreak of the pandemic Covid-19, would impact the pharma/healthcare industry positively as we expect diversification of API/intermediate exposures from China to other parts and India is likely to be a key beneficiary for the same. There is also a likelihood of significant increase in healthcare budgets by governments in the post Covid era and the focus to move incrementally to availability and supply security versus accessibility. On the healthcare side, we expect companies to benefit in the long term due to higher awareness and spending towards healthcare in the post COVID era with significant increase in insurance coverage, government spending and discretionary testing aiding the healthcare sector. The sector is also likely to witness accelerated shift from unorganized to organized as several unorganized players will face challenges in the near term with some unlikely to survive the lockdown, consequently benefitting the listed/organized players.

What is your long term outlook on the healthcare theme in India both from the perspective of exports and the domestic market?

Over a long term, we expect pharmaceutical industry to come out strongly from generic pricing pressure as has been seen with the ~8% growth that these companies have been able to showcase in the export markets over the last few quarters. The industry has also diversified its export revenues and now the US business contributes less than 35% to the overall business versus over 40% at the peak. Further, they continue to evolve to the next level of value chain with focus on specialty/complex products in the US. Few companies have already seen initial success in this segment with approval/launch of several complex/specialty products in the US.

The domestic market seems to have recovered from the shocks of NLEM, Demonetization and GST and is back to growing at double digit from the single digit growth seen during this period. We continue to believe domestic market with its branded nature and substantial under-penetration of healthcare offers long term visibility for profitable growth.

Pharma stocks have historically traded at quite rich valuations. Even a year back, Nifty Pharma Index was trading at TTM PE multiples of around 50 times. Now they are trading in the range of 22 to 23 times. Do you see attractive investment opportunities at these prices?

Over the last few years the valuations for the sector have corrected on the back of the growth headwinds that the sector faced. Pharmaceutical is very stock specific, where each company has its own risks and opportunities, thus even though the valuations have run-up recently we would always find pockets where the valuations are reasonable and provide investment opportunities.

You launched Mirae Asset Healthcare Fund in June 2018. Your CAGR since inception is 9.1% and your return in the last 1 year was in double digits outperforming most of your peers by a big margin. For the benefit of investors, please explain elements of your investment strategy which helped you deliver such strong outperformance in difficult conditions?

We have a bottom-up approach to investment with focus on companies delivering visible and sustainable earning growth and are available at reasonable valuations.Further, portfolio construction is an important aspect to mitigate risk, we seek to construct a diversified portfolio which can deliver risk-adjusted returns.

Healthcare is one of the best performing sectors in the stock market this year. What is your advice for investors who may be considering investments in the healthcare theme? How long should investors be prepared to remain invested in order to see good results?

Markets have been under pressure on account of uncertainty related to the impact of Covid-19, however as discussed earlier healthcare remains largely insulated considering it remains at the top layer of essential services, which has led to its outperformance. Given the secular nature of the industry any investor with a long term horizon of 4-5 years should consider investing in the sector.

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