Reliance Pharma Fund — a popular pharma mutual fund — has performed commendably in the last year, delivering a 10 per cent return. On the other hand, it’s peers, such as SBI, Tata and UTI funds, and the sector benchmarks — BSE Healthcare and Nifty pharma indices — have registered sub-par returns ranging from -2 to -9 per cent during the same period.
The reason Reliance Pharma Fund did so well is mainly because of its fund manager, Sailesh Raj Bhan, who delivered double digit returns despite the pharma sector being in doldrums over the last few years. His cautious approach to pharma companies that export to the US, while favouring companies with a strong domestic presence and those that engage in contract manufacturing and producing biosimilar molecules, has helped the fund deliver the notable return.
Pharma sector in India
Until 2015, the Indian pharma sector had a good run that lasted over eight years. Then it fell out of favour with investors because of multiple challenges in the domestic and global markets. Since 2016, Indian pharma companies have been caught in regulatory tangles and their earnings have been under pressure owing to price erosion in primary drugs in key markets.
Companies that focus on the US market have been hit hard due to stringent action by the US drug regulator Food and Drug Administration (FDA) and structural issues — such as rising competition, consolidation of channel partners leading to less bargaining power, price erosion and lack of new opportunities. This has taken a toll on revenues.
The share price of many Indian pharma majors, who receive sizeable revenue from the US, such as Dr Reddy’s (42 per cent), Lupin (38 per cent) and Sun Pharma (32 per cent), witnessed significant correction in the last two to three years.
Meanwhile, pharma companies with a significant presence in the domestic market have seen reasonable growth in their revenue that led to improvement in the investors’ confidence in the stocks. The growth of the domestic market was boosted by an increase in consumer spending and healthcare insurance, rapid urbanisation, and so on.
However, there were temporary hiccups here too, including implementation of price control in essential medicines, ban of fixed drug combinations, demonetisation and GST, which dampened revenue growth.
The stock prices of companies such as Divis Laboratories, Abbott India, Gufic BioSciences, Pfizer, Ipca Laboratories and FDC have rallied in the last couple of years. The price of Biocon, in particular, has more than doubled in the last year thanks to its strong performance in research services and biologics segment.
Portfolio of Reliance Pharma Fund
Reliance Pharma Fund holds around 20 stocks in its portfolio, out of which the top five account for around 50 per cent of the total assets.
The fund has taken big bets on stocks that focus on domestic consumption, especially the leaders in the chronic segment — diabetes, cardiac, thyroid, and so on. Most of these well-known businesses have good cash flow because of low capex.
The stocks of the top holdings — Divis Laboratories (with 11.8 per cent allocation), Abbott India (10.4 per cent), Sanofi India (9 per cent) and Biocon (7.6 per cent) — rose 80 per cent, 60 per cent, 23 per cent and 111 per cent respectively last year, which helped the fund outperform its peers.
On the other hand, the underperformance of peer schemes was attributable to the higher allocation of stocks that were primarily hit by the slump in the US market. SBI Healthcare Opportunities Fund posted a negative return of 9 per cent last year as it allocated 10 per cent to Cipla, 8.4 per cent to Sun Pharma and 7 per cent to Strides Shasun. Around 15 per cent allocation to Sun Pharma and 10 per cent to the stock of Piramal Enterprises have dragged down the performance of Tata Pharma and HC Fund. The underperformance of UTI Healthcare was primarily driven by higher allocation to Alkem Lab (8.6 per cent), Cipla (8 per cent) and Aurobindo Pharma (6 per cent).