Is it an opportune time to invest in pharma stocks?

Over the past three years, the NSE Pharma Index has fallen 30% even as the benchmark Nifty rose 18%

Published 5 years ago on Jun 20, 2018 2 minutes Read

Praful Bohra, Senior analyst, Equirus Securities

The pharma sector has been a big underperformer for a while now but that is not going to change in a hurry. Though stock prices are showing signs of a recovery, leading drug companies are still facing price erosion in the US, a process that began a couple of years ago. Though the US FDA is approving drugs at a faster pace, prices are still falling by 10-12%. The recent earnings quarter has given enough indication that large-cap pharma companies are still facing headwinds in their biggest market. Beyond a point, it will be unviable for many companies to manufacture and a lot of companies, big or small, will go through portfolio rationalisation. Many companies had a low base last year, so they will witness some growth, but companies which had a high base will have flat or slightly negative kind of growth. I think the industry’s fundamentals are unlikely to improve for the next two to three quarters.

Sailesh Raj Bhan, Deputy CIO - Equity Investments, Reliance Mutual Fund

Pharma stocks have priced in the challenges of competition in the US, regulatory pressure and price erosion. The current valuation isn’t an indicator of the industry’s future. It’s a great time to buy as the sector has underperformed the broader market for more than two years. From a long-term opportunity, prices are attractive driven by years of underperformance. As earnings improve, the valuation will become even more attractive. A lot of companies have faced delays in approvals but with the US FDA speeding up clearance, sentiment will change for the better. In the near term, earnings in the domestic business will continue to trend strongly, while recovery in the US from a low base should start getting visible. The opportunity is attractive as growth returns and investors look beyond the US generic challenges. Earnings may improve given the low base of the past three years, resolution of FDA challenges and robust growth in the domestic market.