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The pharma sector, which had emerged as one of the key winners in November following the surprise win of Donald Trump in the Presidential election, got a rude shock last week with the President-elect saying that he does not like price increases.
Shares of pharma and biotech companies had surged after election results on the expectation that the drug pricing controversy will take a backseat. The general opinion was that a Hillary Clinton win would have been a negative for drug stocks given her frequent rhetoric on rising drug prices and her plans to address the excessive price hikes of treatments that have been available for years and to lower drug prices for all Americans.
Trump, on the other hand, had not been so vocal about drug pricing though he did call for price transparency from all healthcare providers and drug re-importation.
However, the post-election relief rally turned out to be short-lived with Trump saying that his intentions may have been misread by some stock analysts. In an interview with TIME magazine, which has named him “2016 Person of the Year”, Trump said that his goal has not wavered -- he does not like what happened to drug prices and he will bring down drug prices.
M&As to Pick Pace?
Although some headline deals like the Pfizer-Medivation and the Teva-Actavis Generics acquisitions were completed in 2016, mergers and acquisitions (M&A) failed to pick pace this year with the focus mainly being on small bolt-on acquisitions and licensing deals and agreements.
However, with a Trump presidency on the cards, hopes are up that M&A activity will pick up with companies like Pfizer, Merck, Johnson & Johnson expected to take the lead. Big companies with deep pockets often look to replenish and boost their pipelines as well as portfolios by acquiring companies with innovative pipelines and technology. In fact, J&J recently approached Swiss drugmaker Actelion though the companies are yet to announce a deal while Allergan has been very active on the acquisition and deal-making front. Other big players like Sanofi have also expressed an interest in pursuing M&A deals.
Companies with innovative technologies and pipelines are highly sought after. Niche disease areas like nonalcoholic steatohepatitis (NASH), immuno-oncology, multiple sclerosis and hepatitis C virus (HCV) are in demand. Treatments for orphan diseases are also much sought after with quite a few deals being signed in these areas.
Meanwhile, small bolt-on acquisitions, in-licensing activities and collaborations for the development of pipeline candidates are expected to continue.
Another trend being witnessed is the divestment of non-core business segments. Companies like Pfizer, UCB, Novartis, Glaxo and AstraZeneca have all been a part of this trend. The monetization of non-core assets allows these companies to focus on their areas of expertise.
New Product Sales Should Ramp Up
Sales of products that gained approval last year as well as line extensions should ramp up and boost growth. Some recently approved products with blockbuster potential include Regeneron/Sanofi’s PCSK9 inhibitor Praluent, Novartis’ psoriasis treatment, Cosentyx, and Pfizer’s cancer treatment, Ibrance.
Meanwhile, so far in 2016, the FDA has approved 19 new drugs including Zinplava (c. difficile infection), Lartruvo (soft tissue carcinoma), Exondys 51 (Duchenne muscular dystrophy), Epclusa (HCV), Ocaliva (rare, chronic liver disease), Zinbryta (multiple sclerosis), Tecentriq (urothelial cancer), Venclexta (chronic lymphocytic leukemia in patients with a specific chromosomal abnormality), Taltz (moderate-to-severe plaque psoriasis), Cinqair (severe asthma) and Zepatier (HCV) among others. The FDA also expanded the label of cancer drugs like Kyprolis, Imbruvica and Xalkori.
Biosimilars are also a focus area. Pfizer’s acquisition of Hospira gives it a strong position in the biosimilars market. Companies like Novartis are involved in the development of biosimilars as well – in fact, Novartis’ Sandoz was the first company to launch a biosimilar in the U.S.
Pharma ETFs in Focus
Highlighted below are some pharma ETFs - ETFs present a low-cost and convenient way to get a diversified exposure to the sector.
PJP, launched in Jun 2005 by Invesco PowerShares, tracks the Dynamic Pharmaceuticals Intellidex Index. The fund covers health care stocks. The top 3 holdings include Lannett Company, Inc. (5.35%), Pfizer Inc. (5.18%) and Bristol-Myers Squibb Company (5.16%). The total assets of the fund as of Dec 9, 2016 were $856.5 million representing 21 holdings. The fund’s expense ratio is 0.50% while dividend yield is 4.99%. The trading volume is roughly 215,339 shares per day.
XPH, launched in Jun 2006, tracks the S&P Pharmaceuticals Select Industry Index. This ETF primarily covers pharma stocks (99.7%) with the top 3 holdings being Zoetis Inc. (5.31%), Bristol-Myers Squibb Company (5.14%), and Merck & Co., Inc. (4.98%).
Total assets as of Dec 12, 2016 were $457.44 million representing 37 holdings. The fund’s expense ratio is 0.35% and dividend yield is 0.58%. The trading volume is roughly 466,661 shares per day.
IHE, launched in May 2006, seeks investment results that correspond generally to the price and yield performance of the Dow Jones U.S. Select Pharmaceuticals Index. The fund mainly consists of pharma companies (85.4%). Biotech companies account for about 14.5% of the fund.
The top 3 holdings of this fund are Johnson & Johnson (9.84%), Merck & Co. Inc. (8.18%) and Pfizer (8.12%). The total assets of the fund as of Dec 8, 2016 were $667.1 million representing 37 holdings. The fund’s expense ratio is 0.44% with the dividend yield being 1.01%. The trading volume is roughly 34,933 shares per day.
PPH was launched in Dec 2011 and tracks the Market Vectors U.S. Listed Pharmaceutical 25 Index. While the expense ratio is 0.35%, dividend yield is 2.56%. The trading volume is roughly 208,739 shares per day.
Conclusion
While pricing pressure remains a headwind, cost-cutting, downsizing and new products should support growth. Increased pipeline visibility and appropriate utilization of cash should increase confidence in the sector. Moreover, Trump’s pro-business stand is also expected to benefit the sector. Major biotech and pharma companies should gain from Trump’s proposed tax plan and proposal to repatriate corporate profits held offshore at a one-time tax rate of 10%.
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What Lies Ahead for Pharma ETFs?
The pharma sector, which had emerged as one of the key winners in November following the surprise win of Donald Trump in the Presidential election, got a rude shock last week with the President-elect saying that he does not like price increases.
Shares of pharma and biotech companies had surged after election results on the expectation that the drug pricing controversy will take a backseat. The general opinion was that a Hillary Clinton win would have been a negative for drug stocks given her frequent rhetoric on rising drug prices and her plans to address the excessive price hikes of treatments that have been available for years and to lower drug prices for all Americans.
Trump, on the other hand, had not been so vocal about drug pricing though he did call for price transparency from all healthcare providers and drug re-importation.
However, the post-election relief rally turned out to be short-lived with Trump saying that his intentions may have been misread by some stock analysts. In an interview with TIME magazine, which has named him “2016 Person of the Year”, Trump said that his goal has not wavered -- he does not like what happened to drug prices and he will bring down drug prices.
M&As to Pick Pace?
Although some headline deals like the Pfizer-Medivation and the Teva-Actavis Generics acquisitions were completed in 2016, mergers and acquisitions (M&A) failed to pick pace this year with the focus mainly being on small bolt-on acquisitions and licensing deals and agreements.
However, with a Trump presidency on the cards, hopes are up that M&A activity will pick up with companies like Pfizer, Merck, Johnson & Johnson expected to take the lead. Big companies with deep pockets often look to replenish and boost their pipelines as well as portfolios by acquiring companies with innovative pipelines and technology. In fact, J&J recently approached Swiss drugmaker Actelion though the companies are yet to announce a deal while Allergan has been very active on the acquisition and deal-making front. Other big players like Sanofi have also expressed an interest in pursuing M&A deals.
Companies with innovative technologies and pipelines are highly sought after. Niche disease areas like nonalcoholic steatohepatitis (NASH), immuno-oncology, multiple sclerosis and hepatitis C virus (HCV) are in demand. Treatments for orphan diseases are also much sought after with quite a few deals being signed in these areas.
Meanwhile, small bolt-on acquisitions, in-licensing activities and collaborations for the development of pipeline candidates are expected to continue.
Another trend being witnessed is the divestment of non-core business segments. Companies like Pfizer, UCB, Novartis, Glaxo and AstraZeneca have all been a part of this trend. The monetization of non-core assets allows these companies to focus on their areas of expertise.
New Product Sales Should Ramp Up
Sales of products that gained approval last year as well as line extensions should ramp up and boost growth. Some recently approved products with blockbuster potential include Regeneron/Sanofi’s PCSK9 inhibitor Praluent, Novartis’ psoriasis treatment, Cosentyx, and Pfizer’s cancer treatment, Ibrance.
Meanwhile, so far in 2016, the FDA has approved 19 new drugs including Zinplava (c. difficile infection), Lartruvo (soft tissue carcinoma), Exondys 51 (Duchenne muscular dystrophy), Epclusa (HCV), Ocaliva (rare, chronic liver disease), Zinbryta (multiple sclerosis), Tecentriq (urothelial cancer), Venclexta (chronic lymphocytic leukemia in patients with a specific chromosomal abnormality), Taltz (moderate-to-severe plaque psoriasis), Cinqair (severe asthma) and Zepatier (HCV) among others. The FDA also expanded the label of cancer drugs like Kyprolis, Imbruvica and Xalkori.
Biosimilars are also a focus area. Pfizer’s acquisition of Hospira gives it a strong position in the biosimilars market. Companies like Novartis are involved in the development of biosimilars as well – in fact, Novartis’ Sandoz was the first company to launch a biosimilar in the U.S.
Pharma ETFs in Focus
Highlighted below are some pharma ETFs - ETFs present a low-cost and convenient way to get a diversified exposure to the sector.
Powershares Dynamic Pharmaceuticals ETF (PJP - Free Report)
PJP, launched in Jun 2005 by Invesco PowerShares, tracks the Dynamic Pharmaceuticals Intellidex Index. The fund covers health care stocks. The top 3 holdings include Lannett Company, Inc. (5.35%), Pfizer Inc. (5.18%) and Bristol-Myers Squibb Company (5.16%). The total assets of the fund as of Dec 9, 2016 were $856.5 million representing 21 holdings. The fund’s expense ratio is 0.50% while dividend yield is 4.99%. The trading volume is roughly 215,339 shares per day.
SPDR S&P Pharmaceuticals ETF (XPH - Free Report)
XPH, launched in Jun 2006, tracks the S&P Pharmaceuticals Select Industry Index. This ETF primarily covers pharma stocks (99.7%) with the top 3 holdings being Zoetis Inc. (5.31%), Bristol-Myers Squibb Company (5.14%), and Merck & Co., Inc. (4.98%).
Total assets as of Dec 12, 2016 were $457.44 million representing 37 holdings. The fund’s expense ratio is 0.35% and dividend yield is 0.58%. The trading volume is roughly 466,661 shares per day.
iShares U.S. Pharmaceuticals (IHE - Free Report)
IHE, launched in May 2006, seeks investment results that correspond generally to the price and yield performance of the Dow Jones U.S. Select Pharmaceuticals Index. The fund mainly consists of pharma companies (85.4%). Biotech companies account for about 14.5% of the fund.
The top 3 holdings of this fund are Johnson & Johnson (9.84%), Merck & Co. Inc. (8.18%) and Pfizer (8.12%). The total assets of the fund as of Dec 8, 2016 were $667.1 million representing 37 holdings. The fund’s expense ratio is 0.44% with the dividend yield being 1.01%. The trading volume is roughly 34,933 shares per day.
Market Vectors Pharmaceutical (PPH - Free Report)
PPH was launched in Dec 2011 and tracks the Market Vectors U.S. Listed Pharmaceutical 25 Index. While the expense ratio is 0.35%, dividend yield is 2.56%. The trading volume is roughly 208,739 shares per day.
Conclusion
While pricing pressure remains a headwind, cost-cutting, downsizing and new products should support growth. Increased pipeline visibility and appropriate utilization of cash should increase confidence in the sector. Moreover, Trump’s pro-business stand is also expected to benefit the sector. Major biotech and pharma companies should gain from Trump’s proposed tax plan and proposal to repatriate corporate profits held offshore at a one-time tax rate of 10%.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>