Mirae Asset MF's Kasera says healthcare sector to generate good value over 3-5 years

The healthcare sector has the potential to deliver robust returns as incremental-pricing-related challenges are going to get resolved, believes Vrijesh Kasera, Senior Analyst and Fund Manager, Mirae Asset Mutual Fund.

In a candid interview with Moneycontrol, Kasera said that incremental-pricing-related challenges cannot persist for long term and any industry cannot survive in a suppressible pricing environment.

Hence, the fund house believes that no government can afford shortage in healthcare services in their country.

Kasera also emphasised on the proposed central government initiative on insuring ~10 crore households with Rs 5 lakh each, through “Ayushman Bharat” program, which would open up a big opportunity of growth for the Indian healthcare industry.

Kasera will be managing Mirae Asset Healthcare Fund, a new fund offer of the scheme will remain open for subscription until June 25.

According to the scheme information document, the fund will deploy at least 80 percent of its corpus in pharma, healthcare and allied sectors and up to 20 percent in shares of other companies.

It also has the provision to invest up to 20 percent in debt and Money market instruments or in units of debt/liquid schemes of domestic mutual funds.

Excerpts

Q) Why a healthcare fund at this point and time? Is it because of its defensive nature, now that markets are on a downward trend?

Kasera: We strongly believe healthcare is a secular sector and will continue to remain so, as the demand and requirement of healthcare is ever expanding globally.

We believe incremental pricing related challenges cannot persist for long-term and any industry cannot survive in a suppressible pricing environment. Hence, we do not believe any government can afford shortage in healthcare services in their country.

Recent headwinds, in our opinion, are largely factored into the street expectations and also the valuations. Thus, we believe that there is a lot of value in the sector for a long-term investor.

Q) What is your outlook on the sector?

Kasera: We believe that the last three years has taken out a lot of froth in terms of both earning expectations and valuations.

Specifically, if we look at the recent trend that is emerging from the US market, commentary from global pharma companies indicate early signs of stabilization in the market, with players vacating the market which has become economically unviable. The investments on R&D front are also being recalibrated and costs being monitored closely.

Back home in India, the proposed central government initiative on insuring ~10 crore households with Rs 5 lakh through “Ayushman Bharat” program, would open up a big opportunity of growth for the Indian healthcare industry, considering we still have ~70 percent of our population in the rural areas.

We believe if one has a 3-5 year view, the sector has the potential to generate good value for the investors.

Kasera: Healthcare is a broader theme, just to give you a perspective global healthcare is ~USD 7 trln market while pharma is just USD 1 trln market.

Healthcare includes hospitals, diagnostics, medical insurance, medical equipment, fine chemicals and other allied sectors. Most of these sub-sectors unlike pharma generates majority of its revenues from the domestic market.

With lack of medical infrastructure and facilities in India, we believe there is lots of opportunities for the incumbents to grow and penetrate the market.

Kasera: We are not looking at the industry as a domestic vs US focused company. We are focussing on companies where there is clear visibility of earnings growth be it from India or US along with sustainability of business model, management quality, strong balance sheet and reasonable valuations.

Q) Last 2 years have been tough years for the healthcare sectors given the pricing headwinds in US and more regulatory controls by Indian government. When do you see US pricing pressure easing?

Kasera: Pharma companies had high revenue exposure of 35-40 percent to the US generic markets. Over 2009-2014, companies benefited on account of the slow pace of approvals from the USFDA and spate of products going off-patent.

However, over the last 3 years on account of consolidation of the distribution channel along with GDUFA (Generic Drug User Fee Act) implementation by the USFDA led to increased regulatory actions on the non-compliant facilities leading to delay in product launches for affected players and increased the pace of ANDA approvals leading to increased competition.

Both these effectively led to pricing pressure in the US generic market leading to lower margins and lower return on invested capital.

However, based on our interaction with the companies and industry experts, we understand that the withdrawal rates from the US market is picking up pace up from 18-20 withdrawals per month till 2017 to 70 for YTD2018.

We believe we are somewhere close to the bottom of the US related issues that these companies faced in the past because of two key factors. a)  FDA issues getting resolved paving the way for new product approvals and b) visible stabilization in the pricing environment in the US, as indicated by the industry experts.

Q) Which are the segments which can give industry-beating returns? 

Rather than any particular sub-segment outgrowing the other, we believe it would be an all-inclusive growth.

We believe healthcare as a theme should do well. If we look specifically in the Indian market, considering the amount of under-penetration and lack of quality healthcare facilities, the industry has substantial opportunity to grow.

Healthcare penetration or improvement in quality is a key agenda for most governments across the globe. The return profile would be company-specific and different on the back of diverse strategies and geographies that these companies operate in.