Medicine Takes its Own Time

This small, three-fund category which has assets of 131 crore under management, has delivered two-year trailing returns of negative 1.19%, w...

This small, three-fund category which has assets of 131 crore under management, has delivered two-year trailing returns of negative 1.19%, which is substantially better than other equity categories. Compare this with, say, technology funds, which lost 29.96% over the same period.

The pharma sector is defensive in nature and normally it gyrates slowly. This shows in its year-to-date category average of 1.25%, which is much better than the Sensex, which lost 6.9% in the same period. But this sector hasn’t remained untouched from the volatility and has also experienced upheavals. This is also depicted in its index which after gaining 16% in the first quarter lost the gains and is up a meagre 2.02%.

The year started on high note with the Budget providing reductions in custom duty on intermediates and excise duty on formulations, which combined with some breakthroughs in blockbuster generic drugs going off patent in the US, by Indian majors heightened the activity level. But the political instability combined with legal proceedings against companies like DRL, Ranbaxy and Novartis made the stocks, move down quickly after the gain. Though with respect to valuation this is being seen maturing of market, which used to consider high R&D expending as a reason for high PE’s previously, but are now seen as reflection of the company’s capability and preparedness to meet the challenges of a product patent regime.

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On the performance front the pharmaceutical companies have had a healthy year, after a not so healthy last year. And compared to consumer sector, they have clocked double-digit growth with improved margins. For example, after posting a whopping 190% growth in Q2 net profits, Ranbaxy has registered a growth of 12.1% in sales in July. And the total domestic pharma sector has also given a better growth of 9.3% in July 2002. These homegrown companies are investing heavily in original research, to attain selling exclusivity in difficult to manufacture products to gain significant share of the US generic market. The lack of product patent protection in India has also kept many MNCs away, which has helped the highly competitive domestic industry to reap bounty from exports.

However, one should also remember this sector is heavily regulated. Profit margins of players vary widely in both domestic and export sales due to various factors. And strong Indian companies are able to export while foreign-owned are at a disadvantage due to parent’s global presence. And the stocks of this sector don’t race ahead or be on free fall, like technology stocks, because of the intrinsic business solidity of the companies. Incidentally, this sector finds a sizeable exposure in equity-diversified funds.

Pharmaceutical and Healthcare Funds

All these things apart, the complex sector dynamics, the jargon—from bulk drugs to formulations to biotechnology—combined with gyrations of the equity market pose an impediment to direct participation of a lay investor in these sector. If you look at pharma stocks for their reliability and healthy growth prospects, choose a pharma fund for a targeted diversification. The high-growth potential and the availability of world-class companies to invest are two of many compelling reasons to invest here. Given the complexity of the sector, it is indeed a good idea to put your money in a fund and let the fund manager decide about right investments.

At present, there are just three pharma funds to bet your bucks on—Pioneer ITI Pharma, SBI Magnum Pharma and UTI Pharma & Healthcare. One of these could just be the right prescription. The three together have something in common—they have a brief performance history as they were launched in the second quarter of 1999. Their portfolios are alike in complexion and concentration, with almost 50% of the fund invested in top five holdings.

Franklin Pharma

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Fund’s top five holdings are Cipla (14.56%), Glaxo-SmithKlin Pharma (10.88%), Dr Reddy’s Labs (9.51%), Pfizer (9.51%) and Torrent Pharma (8.76%). Together, they account for 53.32% of the portfolio. The fund carries a 2% entry load while exit is at NAV.

UTI Pharma & Healthcare

The largest of the three funds, with assets of Rs 66 crore is passive and has maintained its stodgy top positions. Its top five holdings account for 53.54% of the portfolio, with Ranbaxy Lab at the top constituting 15.54% of the net assets. Entry into the fund is at NAV but charges an exit load of 2%.

SBI Magnum Pharma

This fund has provided the lowest returns in this segment and its trailing one-year return stands at 1.53%. The top five holdings include Ranbaxy Laboratories (10.77%), Glaxo-SmithKline Pharma (9.64%), Cipla(9.54%), Wockhardt (9.03%), and Pfizer(6.66%). It carries 1.75% entry load and no exit charge. Email article to a friend

The writer is the chief executive of Value Research, a leading provider of mutual fund data, analysis and opinion in India

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