Is pharma still a bitter pill or is the worst over?

Nilesh Shetty and Anand Shah on whether pharma stocks can make a comeback

Published 8 years ago on Aug 08, 2016 1 minute Read

Nilesh Shetty, Associate fund manager, Quantum Asset Management: 

For the past five years, we didn’t own a single pharma stock as none was available at an attractive valuation. Today, the market is worried about the regulatory overhang facing the sector. As a result, most pharma stocks are trading lower and have underperformed the market. Some names are trading at 16-17x forward earnings as against 25x just a few months ago. At current valuations, though, some of these risks are well priced in and there is enough margin of safety. In fact, the Street’s pessimistic stance should start dwindling soon and earnings expectations, currently revised downwards, will start to improve. When this happens, some beaten-down stocks will get rerated. But one still needs to be careful about picking the right stock as in some cases, the regulatory risks may actually materialise and could end up impacting the company’s business for a prolonged period of time.

Anand Shah, CIO, BNP Paribas MF:

Structurally, pharma always gets a higher multiple because of the non-cylicality of its earnings. However, today, there is so much uncertainty around FDA issues and its implications on the earnings that we have seen a PE derating. Delays in plant approvals due to stringent FDA assessment has pushed new product launches, resulting in lower near-term growth. Besides, domestic operations are also facing hurdles due to price cuts from regulatory developments in India. In addition, sharp currency depreciation in some countries has affected growth and margins. However, we believe these issues are transitory in nature and growth is expected to revive, especially once approvals start coming in from developed countries. But in the near term, pharma stocks are less attractive compared with other pure domestic themes. We are thus underweight on the sector.