Is it the right time to buy pharma stocks?

The Nifty Pharma Index is down 27% over the past year amid pricing and regulatory pressure

Published 4 years ago on Sep 04, 2019 1 minute Read

Sailesh Raj Bhan, Deputy CIO, Reliance Mutual Fund

When a sector comes out of three-four tough years, it takes a year or two to nurse it back to health. The same applies to pharma. A year ago, only 25-30% pharma companies were doing well, now it’s around 50-60%. There are two factors that have turned favourable in the past year. Firstly, the US generic market has stabilised with reduction in price correction and improvement in profitability. Secondly, the share of profit from the US generic business is much lower compared to three years ago. A lot of revenue is coming from domestic business, which is delivering reasonably good growth. Improvement in US specialty business from a low base and better performance of branded generic business in India will benefit them. Further, the valuations of pharma stocks have also seen a sharp correction due to problems within the sector, and the broader market falling by 10%. On average, valuations reflect a significant bottoming out, especially over six to nine months. Current valuations look rational and the industry will deliver.

Aishvarya Dadheech, Fund manager, Ambit Asset Management

Over the past two years, intense pricing pressure in the US has been a major concern for the pharma sector. Around 30-50% earnings have been dented due to price erosion. In addition, regulatory hurdles have also impacted future earnings with plant clearances stuck at various levels of USFDA. Though there has been some stabilisation on the pricing side in the US, disruption in the way business is conducted will impact the players. We are also worried about probable price regulation in a market like India. Investors are factoring in decent growth for one or two years, but beyond that, we believe the industry is going through drastic change and regulatory clearances remain unclear. Investors need to look at whether a company can survive the transition in the US generic market and other disruptions. Even though valuations have dropped drastically, the earnings cut have been more intense. Despite of stock prices declined dramatically over the past year, valuations still are not attractive. Hence, overall we continue to remain cautious on pharma stocks.