2016 turned out to be a challenging year for pharma stocks with the sector facing a lot of criticism for rising drug prices. Although the election results provided a breather for the sector on hopes that drug pricing would not be a key focus area under a Donald Trump presidency, the relief rally turned out to be short-lived with the President clarifying his stand on rising drug prices. Trump’s statements about not liking price increases and the industry “getting away with murder” ensured that drug pricing is an issue that will remain in the limelight this year as well.
Another factor that weighed on pharma stocks is the noticeably lower number of FDA approvals in 2016. Last year, only 22 treatments gained FDA approval, well below 45 approvals in 2015 and 41 in 2014. The industry was also hit by some high profile R&D failures as well as mixed results, slower-than-expected new product launches and increasing competition. All these factors led to a 9.7% decline in the NYSE ARCA Pharmaceutical Index in 2016.
Will the Drug Approval Process Speed Up?
At a meeting with pharma majors earlier this year, President Trump spoke about speeding up the FDA approval process. The President said that the FDA will be streamlined and the drug approval process will be much faster. The recently signed 21st Century Cures Act is a step in this direction.
With the passing of this Act, expectations are that there will be more innovation in the sector and, maybe, a surge in new drug approvals. Some of the key drugs currently under FDA review with decisions expected in the next few months include Sanofi/Regeneron’s dupilumab (atopic dermatitis), AstraZeneca’s ZS-9, ARIAD’s brigatinib (cancer), Tesaro’s niraparib (cancer) and Lilly/Incyte’s investigational rheumatoid arthritis treatment, baricitinib.
M&As to Pick Up in 2017?
There has been a lot of consolidation in the pharma industry over the last few years with quite a few deals being announced/completed in 2016. Expectations are high that M&As will increase as the year progresses -- potential tax reform and cash repatriation are expected to lead to a boost in this area. We could see several M&A agreements being announced in the coming quarters though companies are wary of bidding wars leading to over-priced deals.
Companies with innovative technologies and pipelines are highly sought after. Niche disease areas like nonalcoholic steatohepatitis (NASH), immuno-oncology and multiple sclerosis are in demand. Treatments for orphan diseases are also much sought after with quite a few deals being signed in these areas.
Restructuring activities are also gaining momentum as large pharma companies look to cut costs and streamline operations. Most of these companies are re-evaluating their pipelines and discontinuing programs with an unfavorable risk-benefit profile.
Catalyst Rich 2017
Pharma companies continue to work on bringing innovative new treatments to market, and there could be significant catalysts in the coming quarters in the form of important new product approvals as well as major data read-outs especially in key therapeutic areas like immuno-oncology, Alzheimer’s, central nervous system disorders, and immunology/inflammation.
Meanwhile, sales of products that gained approval over the last two years as well as line extensions should ramp up and boost growth.
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 Bristol-Myers Squibb Company (5.33%), Amgen Inc. (5.31%) and Celgene Corporation (5.29%). The total assets of the fund as of Mar 13, 2017 were $789.4 million representing 23 holdings. The fund’s expense ratio is 0.50% while dividend yield is 0.85%. The trading volume is roughly 56,178 shares per day.
SPDR S&P Pharmaceuticals ETF (XPH - Free Report)
XPH, launched inJun 2006, tracks the S&P Pharmaceuticals Select Industry Index. This ETF primarily covers pharma stocks with the top 3 holdings being Jazz Pharmaceuticals plc (5.37%), Allergan plc (5.13%), and Eli Lilly and Company (5.11%).
Total assets as of Mar 13, 2017 were $468.2 million representing 38 holdings. The fund’s expense ratio is 0.35% and dividend yield is 0.59%.The trading volume is roughly 59,016 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 (89.3%). Biotech companies account for about 10.6% of the fund.
The top 3 holdings of this fund are Johnson & Johnson (10.4%), Pfizer Inc. (8.46%) and Merck & Co. Inc. (8.05%). The total assets of the fund as of Mar 13, 2017 were $735 million representing 40 holdings. The fund’s expense ratio is 0.44% with the dividend yield being 0.84%. The trading volume is roughly 17,326 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. This ETF covers healthcare stocks. While the expense ratio is 0.35%, dividend yield is 2.28%. The trading volume is roughly 14,094 shares per day. The total assets of the fund as of Mar 13, 2017 were $336.9 million representing 26 holdings. The top 3 holdings of this fund are Johnson & Johnson (10.27%), Novartis AG (7.90%) and Pfizer (6.81%).
While the drug pricing issue will remain a headline risk in 2017, increased pipeline visibility and appropriate utilization of cash should increase confidence in the sector.
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