The key issues of the sector:
1) The MNCs are already well placed to take on the competition. Once the WTO norms are in place, one would see MNCs unveil a gamut of products, which they are now reluctant to launch for fear of them being copied. 2) Indian companies are increasingly going global. Where Indian Patent Laws have for long recognised only process patents, companies have developed strong process skills that can produce bulk drugs (active chemical ingredients in the tablets) at commercially viable/dirt cheap costs. As Indian companies lack the required wherewithal for producing formulation drugs (drug in a ready-to-consume form), they know that which side of the bread is buttered and are thus going to capitalise on their processing skills by concentrating on basic research. This is certainly going to stand them in a good stead as world over a great emphasis is being laid on reducing the process cost of the drug. Besides, with a number of drugs going off-patent in the US, there is going to be a deluge of opportunities for the Indiancompanies. 3) Of course, the odds are also stacked up. Indian companies looking at US markets will have to upgrade their manufacturing facilities to comply with the US regulatory requirements. While this is going to call for deep pockets, mergers/acquisitions/alliances would bring about a massive consolidation in the highly fragmented sector. 4) Companies having a diverse range of products in their arsenal would be less risky than companies banking on a narrow product range. Recently, the growth of quite a few companies in the domestic industry came under pressure because of the same reason compounded by the price cuttings in a couple of drugs.Case for Pharma funds:
Despite the defensive nature of the sector, the risks cannot be discounted, given the imminent changes and the uncertainty about how the events would unfold in the future. While the Indian companies may be sitting on a pot of gold, the risks are also immense. If you'd like to boost your portfolio's exposure to drug and healthcare stocks, you can choose from three funds, dedicated to the pharma sector - Kothari Pioneer Pharma, Magnum Pharma and UTI GSF Pharma & Healthcare. Given the poor performance of the sector in the markets, all these funds, launched just over a year back, are currently ruling below their par values. While, these funds had underperformed the I-Sec pharma index during the rising markets, they have weathered the falling phase much better.

Kothari Pioneer Pharma Fund, launched in April '99 has returned an annualised 1.9% since launch. The fund touched a high of Rs 15.74 in October '99. It maintains a higher allocation to MNC stocks, which ranges between 60-65%. The top holding of the fund is Hoechst Marion Roussel, which accounted for 9.71% of the assets on September 30. The portfolio is top heavy, with top five stocks accounting for 43.63 per cent of the total assets. The fund currently has a size of Rs 52 crore. The fund carries a 2% entry load while exit is at NAV.

SBI Magnum Pharma Fund, which took off in July '99 is down an annualised 4.5% since launch. The initial investments of the fund made in the post-cyclical rally of April-June '99 enabled it to pick up stocks at relatively low levels. As a result, despite the late entry, the fund was able to ride the short-term tide in these stocks and touched high of Rs. 15.65. The fund's allocation to MNCs and Indian Companies stands at 60:40.

The fund currently has a size of Rs 19 crore. The fund carries a 1.5% entry load while the exit is at NAV. UTI Pharma & Healthcare was launched at the same time as Magnum Pharma Fund. The fund is down an annualised 3.83%. With a size of Rs 68 crore, the fund has half of its assets allocated to MNCs. It however, has the top holdings in Ranbaxy Laboratories and Cipla, which together account for 30% of the portfolio. While, entry into the fund is at NAV, the fund charges an exit load of 2%. Some other funds with a relatively higher allocation to the sector are Alliance Buy India fund with 33% exposure, Tata Life Sciences and Technology fund with 26% and Birla MNC with 20%. With the pharma sector fragmented in India, the implementation of WTO norms is also expected to unleash mergers and acquisitions in the sector. The low NAVs present an attractive opportunity for investors to enter pharma funds. With the sector expected to see a rapid growth, investments in the "bitter" companies now could give sweet returnsin the future.

-- Value Research