A boom in the market may be unpredictable but need not necessarily prove to be a bubble.
Experts believe that the pharma and healthcare sector provides a great platform for investment not only now but also for the coming decade. The biggest advantage with this sector is that spends are non-discretionary in nature and investors have an opportunity to get relatively stable returns.
MODELS OF THE PHARMA AND HEALTHCARE BUSINESS
Five different business models lie in the ambit of Indian healthcare.
Domestic and export branded generics market: Most Indian companies sell branded generics in India and emerging markets. They also promote products to the customer. This is a high return on equity (RoE) business with a secular growth in terms of penetration.
Exports unbranded generic market: Many Indian companies manufacture and sell unbranded generics to distributors based out of developed nations like the US and UK. This is a low RoE and highly capital-intensive business which experiences bouts of volatility in pricing and volumes.
API manufacturing: Some companies manufacture API and sell it to formulation manufacturers as a key raw material. This is a B2B business with an overall handsome profitability.
Hospitals: Super specialty hospitals can be highly profitable if the brand is reputed. Multi-specialty hospitals are less profitable but get higher volumes and are easier to scale up.
Diagnostics: It presents an unorganised market within India but pan India organised players are expanding their share.
Before you pick stocks and business models, you need to understand which part of the pharma and healthcare business you want to bet on. “There are multiple business models within healthcare and the nuance of each business is different. Hence, one must pay attention to details,” says Aditya Khemka, Fund Manager, InCred AMC. “The healthcare sector has been a wealth creator for shareholders over long periods of time. Over 17 years, the sector has outperformed the Nifty50 by 57% (i.e. 3% annualized outperformance).” he adds.
INDIAN HEALTHCARE AS A LUCRATIVE SPACE
Indian investors should first look to invest in Indian healthcare. This space has a global competitive advantage because it comes with the most affordable costs and quality manufacturers for finished formulation products which are exported across the continents. For the average investor it always makes sense to invest where there’s global competitiveness, more so, because this sector is not vulnerable to any radical policy changes.
Investing in foreign healthcare is a lucrative option too as companies abroad are investing in inventions, innovations and creating new solutions to newer problems. The market, however, is more expanded and its behaviour even more uncertain.
Again, the insurance sector in India is taking care of the demographics that could not earlier afford quality pharma and healthcare products and services. With government intervention now, accessibility and affordability to medicines and healthcare products and services have expanded. The Indian allopathy market is rapidly and commendably advancing in terms of growth and penetration.
While a basket approach is generally recommended, below are a few tips from Khemka on how to invest in healthcare:
Look at the investment as secular and not tactical:Most errors in investing are made due to incorrect timelines. Given that healthcare as a sector in India is secularly growing for the past few decades, it’s important that investors look at it with a longer-term horizon.
Sustainability of cash flow is more important than its size: Though investing in large market cap companies is comparatively safer, we recommend that investors do not extrapolate this convention to pharma companies.
Regulatory risks are a part of this business: Many investors allocate lesser capital for pharmaceuticals stating regulatory risks like price control and USFDA audit failures. Pharma companies have however exhibited an ability to overcome these setbacks over the longer term.
The pharma sector was one of the best performing indices of 2020. With historic average and RoE consistently improving, small and midcap pharma companies should be the investors’ preference over large caps. The market is bullish on the prospects of the API business and chronic businesses also look to impressively continue their performance.
“Generic pharmaceutical manufacturing is an area where India has exhibited a global competitive advantage. Hence, we strongly recommend that investors not only allocate capital to this segment but maintain their investments for long periods of time to experience compounding of wealth,” says Khemka.
PROMISE OF UNBOUNDED GROWTH IN HEALTHCARE
The healthcare sector as an investment opportunity looks promising. Hospital and diagnostic businesses are normalizing fast. Driven by better healthcare awareness, rise in incomes, increased access to insurance and lifestyle-related diseases, India’s healthcare market is expected to reach USD 372 bn by 2022. The government aims at increasing the healthcare spending to 3 per cent of the GDP by 2025.
A few factors encouraging future investments in the sector are:
Medical infrastructure in Tier II and III cities: Hospital chains and specialty centres are coming forward to build more emergency-proof capacities, especially in Tier II and III cities. Government efforts are also being directed to increase the number of hospital beds per thousand people.
Health insurance awareness: An increased awareness of health insurance products in the past few years has made more people are invest in health insurance.
Government policies: Government efforts in achieving a universal health cover under ‘Health for All’ and schemes like Ayushman Bharat and National Digital Health Mission have sped up too.
Medical tourism: The Indian healthcare sector is attractive to foreign patients due to the availability of quality services at relatively lower costs compared to countries in Western Europe or the U.S.
Use of technology: Online consultations and technology platforms are in high demand. In August 2019, the Ministry of Health and Family Welfare introduced the eSanjeevani app, an integrated web-based telemedicine solution which makes healthcare services easily available.
Economy is like a man and the market like a dog led by the man. The market will end up reaching where the economy reaches. Given the volatile nature of the market, investors should comprehend not what the dog is doing, but where the man is going. Let’s focus in understanding the economy and the businesses we’re betting into, so that we find the direction to our desired growth.