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We Believe That Last 3 Years Have Taken Out A Lot Of Froth From The System: Vrijesh Kasera, Mirae Asset AMC

In an interview with BW Businessworld, Vrijesh Kasera, Senior Research Analyst and Fund Manager, Mirae Asset AMC, talks about investment in pharmaceuticals sector


Vrijesh, what's the rationale behind launching a healthcare focused fund at this stage? Anecdotal evidence would suggest that investors aren't exactly gung-ho about this space right now, particularly pharmaceuticals…
We believe that the last 3 years have taken out a lot of froth from the system in terms of both earnings expectations and valuations. If we go by the recent commentary of global pharma companies, it indicates early signs of stabilization in the market, with players vacating the market which has become economically unviable.  The investments on R&D are also been recalibrated and cost being monitored closely. We believe if one has a 4-5 year view then the sector has potential to generate good value for the investors.  
In recent times, Pharma has struggled due to USFDA FDA related issues as well as demonetisation & GST. Do you feel that these headwinds are finally finished now?
Pharma companies had high exposure 35-40% to the US generic markets.  Over the 2009-2014 period, the companies benefited on account of spate of products going off-patent and slow pace of approvals from the USFDA, which led to lower competition. However, over the last 3 years on account of consolidation of the distribution channel along with GDUFA 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 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 the 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.Further, the incremental escalations of a 483 observation has slowed down considerably to ~6% of the total 483s issued from ~24% (in 2013-2014) over the last 2-3 years.  We thus believe that with FDA issues getting resolved paving the way for new product approvals as well as visible stabilization in the pricing environment in the US, we are somewhere close to the bottom of the US related issues that these companies faced in the past. On the domestic front, GST impacted the sector as channel inventory corrected initially. However, the inventory cycle has now normalized and growth rates in the domestic market have returned to the normal levels.
What percentage of your portfolio will you be allocating to hospitals? What's your view on the hospitals space as a whole?
The overall weightage of the for hospitals in the benchmark is ~5%, we thus can't have any disproportionate weights on the sector. We believe there is a lot of skepticism on the government intervention on pricing which has kept the sector out of favour.  However, over the longer run the companies have been able to manage and readjust their business models to the new normal, as now they are well prepared for  regulatory actions. Overall in the longer run we believe the inadequate infrastructure that we have in India and now with the government also talking about insuring people to make quality facilities available to the general public, we remain positive on the space as a whole.
What's your take on the purported conflict of interest between hospitals and health insurers? Does it exist - and if yes, what measures are being taken to resolve the issue?
Yes there is always a conflict between Insurers and hospitals. Infact the realization on EWS insurance schemes is the lowest, hospitals make margins of 5-8%. Followed by PSU insurance schemes where margins are high single digit. Then comes corporate medical insurance schemes which have like cash less facility gives mid-teen kind of margins.  Cash patients give the best margins. The difference is because of the negotiation by insurance companies. That is the reason, tier I hospital chains don't entertain EWS schemes patients.   The conflict happens when a particular party starts to make money at the expense of the other. So the conflict won't arise if policies/schemes are not partial to either parties and both in the longer run benefit.
Do you see Medical Tourism as a major contributor to health care revenues at this time? Which companies are best poised to capitalise on this trend?
Yes, healthcare tourism will grow very strongly because India is one of the cheapest and quality destination.  If you look at data, medical tourist in India have grown at a CAGR of 20% over the last 10 years, with majority coming from the SE Asian countries. Any company which is internationally accredited will benefit from this opportunity.
What are the key risks to the healthcare sector at this stage? Is it still by and large a "defensive" sector like FMCG, or should only high risk taking investors consider investing into healthcare funds now?
For any evolving sector, regulatory environment needs to be watched out for, however over the longer term maturity comes in the overall ecosystem.  We strongly believe healthcare is a secular sector and continues to remain so, as the demand and requirement of healthcare is ever expanding. There are periods of lull in even secular sectors but the nature of that sector doesn't change.   As said earlier, we believe a lot of froth in terms of both, earnings expectations and valuations have been removed and if one has a 4-5 year view, then the sector has a potential to generate good value for the investors.

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