China’s recovery from coronavirus outbreak, drug demand lift pharma funds

Pharma sector funds are seeing sharp uptick in returns as China’s recoveryfrom outbreak has eased concerns on supply chain issues, and fund managers are expecting pharma companies’ toplines to gain amid high domestic and global demand for hydroxychloroquine, anti-malarial drug considered key in treatment of

According to data from Value Research, the one-week returns of pharma sector funds were 6.3 per cent. Among the equity categories, it is the only category to have given positive returns.

Fund managers say pharma funds face near-term challenges, but there are positive triggers with Cornavirus cases in China coming under control.

“Worries remain in terms of transporting products from ports to plants. Also, labour issues at plants continue to remain, but companies are trying out things to keep production going with limited manpower,” said Meeta Shetty, fund manager at Tata Mutual Fund (MF), who is part of fund management team of Tata India Pharma and Healthcare Fund.

“More importantly, overhang of supply chain issues coming from China have eased. Domestic companies already have 30-40 days of inventory to deal with any short-term challenges,” Shetty added.

Further, certain pharma stocks are also seeing an upmove as demand for hydroxychloroquine — drug produced in large quantities in India — has seen sharp pick-up as it is being given to patients as part of treatment.

In one week, listed entities producing hydroxychloroquine have gained 18-22 per cent. Shares of IPCA Laboratories have gained 18.6 per cent, Cadila Healthcare and Mangalam Drugs and Organics are up 22 per cent each.

On Tuesday, India also partially lifted export ban on hydroxychloroquine, allowing it to be exported on a case-by-case basis, with US government seeking India’s support to get the drug supply for their requirement.

Fund managers add that domestic pharma sector is in a favourable spot due to a combination of factors, apart from Coronavirus-related triggers. “Pharma sector valuations had turned attractive due to US FDA-related issues. Large companies are trading at all time low multiples. Earnings are already on a recovery mode for the last 12 months. While most sectors are likely to see significant negative impact from Coronavirus, pharma sector will see relatively less impact. Moreover, there will be a long-term positive impact from higher focus on healthcare,” said Sailesh Raj Bhan, deputy chief investment officer at Nippon India MF.

“Pharma sector is relatively under-owned sector. As weight of the sector catches up in frontline indices over next few months, we could also see larger quantum of foreign passive flows coming into the sector,” Bhan added.

In one-week period, Nifty Pharma has clocked gains of 8.1 per cent. In year-to-date, the index continues to remain marginally in positive territory, whereas all other sectoral indices are in negative zone. The benchmark Nifty is down 27.8 per cent in year-to-date period.