Pharmaceutical Funds: Back In Action

Updated: Nov 9 2003, 05:30am hrs
Pharma funds were not having a good time in the last few years. For two consecutive years in 2000 and 2001 they were down in the dumps. Even the last year was no better and pharma funds fell marginally. Finally, this year has seen a strong turnaround by these funds.

Year-to-date through November 6, 2003, the pharma fund category of three funds has gained an average 67.23 per cent. With buying interest coming into pharma stocks, the BSE Healthcare Index gained 68.36 per cent. In the process, pharma stocks have outperformed the broad market with the BSE Sensex gaining 49.46 per cent in this period.

There has, thus, been a strong revival of the sector and pharma funds. The biggest boost for the sector has come with new US FDA rules, which curtail the patent holders ability to delay the launch of generic drugs. This will be a big boost to domestic drug companies, which are heavily involved in exports. This is expected to further strengthen the potential for India to emerge as a major destination for outsourcing.

In fact, the healthcare industry is already worth $6.5 billion and it has been expanding at the rate of 8-10 per cent a year. Today it is the fourth largest pharmaceutical industry in terms of volumes and 13th in value.

Recently exports have crossed the $2 billion mark, and have increased by 30 per cent in the past five years. The recent agreement in the WTO over relaxation of patent norms on drugs for poor countries has also revived interest in the sector.

For long, the Indian pharma companies have exploited the opportunity in generic exports, leaving their MNC counterparts miles behind. However, market dynamics may change after 2005, when the pharma sector will have to adhere to product patent regime.

While pharma MNCs will have the advantage of introducing their parents products in the domestic markets, the Indian companies will have to concentrate on research and development to remain competitive. That apart, the sector is heavily regulated in terms of price discovery of drugs.

Keeping in mind the economic need to ensure quality production and supply at reasonable prices, the government fixes prices of a specific list of bulk drugs. Thus, the revision in the price of controlled drugs affects the sales of pharma companies. Also, complex sector dynamics coupled with gyrations of the equity market can pose problems for an investor who is convinced about the long-term growth of the sector. In such a situation, pharma funds are a good option as the onus of taking the call is on the fund manager, specially if their current portfolio comprising equity funds doesnt have meaningful exposure to the pharma sector.

Moreover, by owning a pharma fund you are avoiding excessive volatility. The standard deviation of an average pharma fund (6.06 per cent) is lower than that of many other equity fund categories. At present, there are just three pharma funds you could bet your bucks on.

They are: UTI Pharma & Healthcare Franklin Pharma and Magnum Pharma. Since these funds were launched in 1999, they have a brief performance history.

UTI Pharma & Healthcare: Of the three pharma funds in existence, UTI Pharma is the largest fund. The fund has gained 59.67 per cent in the current calendar. With assets of Rs 62.98 crore, as on September 30, 2003, this rather passively managed fund has maintained its top position in the trailing 3-year. Its top five holdings account for nearly 50 per cent of the portfolio, with Ranbaxy making up for 14.38 per cent of net assets. While there is no entry load, the fund charges a 2 per cent exit load.

Franklin Pharma: This second-largest fund ranks third on the performance front over the 1-year and 3-year period. During the current calendar, the fund is up 67.75 per cent. The leading pharma companies-Ranbaxy, Dr Reddys, Pfizer, Cipla, Sun Pharma account for more than 50 per cent of the funds assets. Also this was the only fund to participate in the initial public offering of Divis Laboratories.

Magnum Pharma: This fund is placed in the middle of the category in terms of performance. However, in the current calendar it has raced ahead with 74.27 per cent return. Also, during the same time period, the fund maintained cash exposure above 30 per cent. (Value Research)