The pharma sector remains in the limelight thanks to the ongoing drug pricing controversy. Over the past one year, both pharma and biotech stocks have been under immense pressure due to the pricing controversy. While the high price of drugs has always been a matter of concern, political and media focus on this issue has increased significantly since last September following Democratic Presidential candidate Hillary Clinton’s “price gouging” tweet.
The situation has heated up in recent times given the price hikes taken by Mylan for its life-saving combination product EpiPen. Clinton announced a health care plan that will address the excessive price hikes of treatments that have been available for years and also reaffirmed her earlier broader plan, announced last September, with the aim to lower drug prices for all Americans. (Read: Pharma ETFs Soaring on Solid Q2 Earnings)
With drug costs remaining a concern and lawmakers focusing on the need to control drug prices and make prescription drugs affordable, drug companies may find it a bit difficult to justify their high prices by citing the years and funds that go into bringing new treatments to market and the need to invest in R&D to bring additional treatments to market.
On a positive note, Allergan’s CEO Brent Saunders said in a blog post that the company will not engage in price gouging actions or predatory pricing and will limit price increases.
M&As to Continue?
With Pfizer recently announcing that it will be acquiring oncology-focused Medivation for approximately $14 billion, expectations are that M&A activities will pick up pace in the latter half of the year. Meanwhile, small bolt-on acquisitions, in-licensing activities and collaborations for the development of pipeline candidates are expected to continue.
Several pharma companies are focusing on in-licensing mid-to-late stage pipeline candidates that look promising, instead of developing a product from scratch, which involves a lot of funds and time. Small biotech companies are open to such deals -- most of them find it challenging to raise cash, thereby making it difficult to survive and continue with the development of promising pipeline candidates. Therefore, it makes sense to seek deals with pharma companies sitting on huge piles of cash. (Read: Top Sector ETFs of Summer)
Therapeutic areas attracting a lot of interest include central nervous system disorders, hepatitis C virus (HCV) and immunology/inflammation. Another highly lucrative area is immuno-oncology. Major players in this field include Bristol-Myers, AstraZeneca, Merck and Roche.
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 Products Should Gain Traction
Highly-awaited new products that gained approval last year should contribute significantly to revenues. While 45 drugs were approved by the FDA last year, so far in 2016, the FDA has approved 16 drugs. (Read: ETFs to Gain or Lose if Trump Wins Presidential Election)
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)
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 Allergan plc, Merck & Co. Inc. and Johnson & Johnson (5.04% each). The total assets of the fund as of Sep 7, 2016 were $1,101.3 million representing 23 holdings. The fund’s expense ratio is 0.56% while dividend yield is 4.32%. The trading volume is roughly 66,769 shares per day.
SPDR S&P Pharmaceuticals ETF (XPH)
XPH, launched inJun 2006, tracks the S&P Pharmaceuticals Select Industry Index. This ETF primarily covers pharma stocks (99.7%) with the top 3 holdings being Mallinckrodt plc (5.73%), Endo International plc (5.68%), and Merck & Co., Inc. (5.09%).
Total assets as of Sep 6, 2016 were $509.7 million representing 36 holdings. The fund’s expense ratio is 0.35% and dividend yield is 0.54%.The trading volume is roughly 190,063 shares per day.
iShares U.S. Pharmaceuticals (IHE)
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 (87.2%). Biotech companies account for about 12.7% of the fund.
The top 3 holdings of this fund are Johnson & Johnson (10.16%), Merck & Co. Inc. (8.47%) and Pfizer (8.43%). The total assets of the fund as of Sep 7, 2016 were $599.4 million representing 37 holdings. The fund’s expense ratio is 0.44% with the dividend yield being 0.99%. The trading volume is roughly 15,010 shares per day.
Market Vectors Pharmaceutical (PPH)
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 2.38%. The trading volume is roughly 27,771 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.
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Will a Clinton Presidency Spell Doom for Pharma ETFs?
The pharma sector remains in the limelight thanks to the ongoing drug pricing controversy. Over the past one year, both pharma and biotech stocks have been under immense pressure due to the pricing controversy. While the high price of drugs has always been a matter of concern, political and media focus on this issue has increased significantly since last September following Democratic Presidential candidate Hillary Clinton’s “price gouging” tweet.
The situation has heated up in recent times given the price hikes taken by Mylan for its life-saving combination product EpiPen. Clinton announced a health care plan that will address the excessive price hikes of treatments that have been available for years and also reaffirmed her earlier broader plan, announced last September, with the aim to lower drug prices for all Americans. (Read: Pharma ETFs Soaring on Solid Q2 Earnings)
With drug costs remaining a concern and lawmakers focusing on the need to control drug prices and make prescription drugs affordable, drug companies may find it a bit difficult to justify their high prices by citing the years and funds that go into bringing new treatments to market and the need to invest in R&D to bring additional treatments to market.
On a positive note, Allergan’s CEO Brent Saunders said in a blog post that the company will not engage in price gouging actions or predatory pricing and will limit price increases.
M&As to Continue?
With Pfizer recently announcing that it will be acquiring oncology-focused Medivation for approximately $14 billion, expectations are that M&A activities will pick up pace in the latter half of the year. Meanwhile, small bolt-on acquisitions, in-licensing activities and collaborations for the development of pipeline candidates are expected to continue.
Several pharma companies are focusing on in-licensing mid-to-late stage pipeline candidates that look promising, instead of developing a product from scratch, which involves a lot of funds and time. Small biotech companies are open to such deals -- most of them find it challenging to raise cash, thereby making it difficult to survive and continue with the development of promising pipeline candidates. Therefore, it makes sense to seek deals with pharma companies sitting on huge piles of cash. (Read: Top Sector ETFs of Summer)
Therapeutic areas attracting a lot of interest include central nervous system disorders, hepatitis C virus (HCV) and immunology/inflammation. Another highly lucrative area is immuno-oncology. Major players in this field include Bristol-Myers, AstraZeneca, Merck and Roche.
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 Products Should Gain Traction
Highly-awaited new products that gained approval last year should contribute significantly to revenues. While 45 drugs were approved by the FDA last year, so far in 2016, the FDA has approved 16 drugs. (Read: ETFs to Gain or Lose if Trump Wins Presidential Election)
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)
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 Allergan plc, Merck & Co. Inc. and Johnson & Johnson (5.04% each). The total assets of the fund as of Sep 7, 2016 were $1,101.3 million representing 23 holdings. The fund’s expense ratio is 0.56% while dividend yield is 4.32%. The trading volume is roughly 66,769 shares per day.
SPDR S&P Pharmaceuticals ETF (XPH)
XPH, launched inJun 2006, tracks the S&P Pharmaceuticals Select Industry Index. This ETF primarily covers pharma stocks (99.7%) with the top 3 holdings being Mallinckrodt plc (5.73%), Endo International plc (5.68%), and Merck & Co., Inc. (5.09%).
Total assets as of Sep 6, 2016 were $509.7 million representing 36 holdings. The fund’s expense ratio is 0.35% and dividend yield is 0.54%.The trading volume is roughly 190,063 shares per day.
iShares U.S. Pharmaceuticals (IHE)
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 (87.2%). Biotech companies account for about 12.7% of the fund.
The top 3 holdings of this fund are Johnson & Johnson (10.16%), Merck & Co. Inc. (8.47%) and Pfizer (8.43%). The total assets of the fund as of Sep 7, 2016 were $599.4 million representing 37 holdings. The fund’s expense ratio is 0.44% with the dividend yield being 0.99%. The trading volume is roughly 15,010 shares per day.
Market Vectors Pharmaceutical (PPH)
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 2.38%. The trading volume is roughly 27,771 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.
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 >>