Deputy CIO Nippon Mutual Fund and Fund Manager for Nippon Pharma Fund; Mr. Sailesh Raj Bhan in an interview with the Economic Times said that pharma is one of the sectors where high earning is visible and also stated that the earnings could double over the next 4 to 5 years. Average returns from pharma funds are 53% over the last one year. In this space, the challenges faced in the Covid-19 pandemic have brought healthcare to the top of everyone’s mind and with just 1.6% of GDP being spent on healthcare in FY20, India is under-invested to take care of the rising demand for these services. A dramatic change in investment in both public and private sector is the need of the hour as this also presents multiple opportunities across health tech solutions, diagnostics, hospital care and medical insurance. After 3-4 difficult years of 2016-18 the pharma sector has been in an improving trend. Companies in the space have cut costs, US pricing pressures started to stabilize and the sector came out of a low profit phase and on an uptrend. The ownership of this sector was limited with institutional and retail investors. When companies witnessed good growth in Jan-March quarter, companies preponed stocking as the supply chain could be disrupted. Covid 19 has further bought this space in the limelight however, it could also be viewed structural improvement from the lows. Mr. Bhan also stated that the share of domestic profits has increased, the local business are profitable and it is akin to a consumer business. Companies have done cost cutting, reduced R&D cost, manufacturing cost and are redesigning and refocusing themselves. That has led to lot of cost savings that has supported earnings. Companies are also exiting unprofitable markets. Also currency depreciation has helped these companies. So, all of these has happened in the ast two years and that is visible in earnings now. After this sharp run pharma stocks are more expensive now than they were six months back. However, Mr. Bhan also pointed out that the underlying trends are improving. Domestic opportunity can provide consistent earnings growth, international opportunity is turning around and add to growth for companies. Earnings in the sector will double over a 4-5 year period. This kind of visibility is not possible in many sectors so easily. Earnings-led returns to investors should be possible for investors in this space. ndia has the 2nd largest population pool over the age of 50 years in the world with over 26.7 cr people in this bracket. This would make the “50 plus population in India” rank amongst the top 4 countries (India ranking 2nd) in the world by size of population. Nearly 80 to 90 lakh individuals will enter the 50 plus age bracket each year for the next 20 years to reach 44.5 crore in 2040. This is important for the pharma sector as consumption of medicines in age groups over 50+ is many times higher than in younger population, creating a wave of rising demand for the next 2 decades. On being asked whether high margins in the recent quarters enjoyed by the pharma sector is sustainable or not, he said that Over a period of time things will normalize and pharma companies will retain at least 30-40% of the savings. Reported margins in recent quarters are all time high margins as there is no spending no sales promotion, little field promotion costs on account of Covid 19. Lastly, on the the opportunities for pharma companies in India, he said that Nearly 80 to 90 lakh individuals will enter the 50 plus age bracket each year for the next 20 years to reach 44.5 crore in 2040. Comparing this with Germany, which is considered a super aged country, only has 3.7 cr people over the age of 50 years. India’s population of 50+ is nearly 7 times higher than that of Germany (50+) today and is over 3 times the total population of UK. This is important for the pharma sector as consumption of medicines in age groups over 50+ is many times higher than in younger population, creating a wave of rising demand for the next 2 decades. Not to forget India is unfortunately “The Chronic Disease Capital of the World”, a developing country with developed country disease patterns. Companies providing solutions to these therapies are well poised to growth rapidly in years to come.
Sunday, April 11, 2021