Investors may find growth opportunities in the healthcare sector and related exchange traded fund as the industry continues to develop new innovative products.
For instance, U.S. healthcare conglomerate Johnson & Johnson (NYSE: JNJ) announced that in the next four years, it expects to submit over 10 new medicines, which could potentially generate $1 billion in annual revenue each, Reuters reports.
Later this year, J&J plans to file for approval for the experimental drug daratumumab for multiple myeloma, a type of blood cancer, in the U.S. and Europe. Wells Fargo analyst Larry Biegelsen projects daratumumab sales could hit $1.3 billion by 2019.
The shift into research and development comes at a time as big pharmaceutical names brace for large drug patent expirations.
“Johnson & Johnson’s R&D efforts support its robust revenue base,” according to Morningstar‘s Sector Director Damien Conover. “In pharmaceuticals, the company recently launched several new blockbusters, which should allow Johnson & Johnson to escape largely unscathed from upcoming patent expirations, unlike many of its competitors.”
J&J, along with other innovators, will help support the growing healthcare industry. The company is the largest component in many broad healthcare-related ETFs. For example, J&J makes up 10.2% of Health Care Select Sector SPDR (NYSEArca: XLV), 9.8% of iShares U.S. Healthcare ETF (NYSEArca: IYH), 8.6% of Vanguard Health Care ETF (NYSEArca: VHT) and 8.5% of Fidelity MSCI Health Care Index ETF (NYSEArca: FHLC).
XLV is the largest healthcare ETF available. IYH provides a suitable alternative, but comes with a heftier 0.43% expense ratio. VHT also shows similar exposure, except it has a much broader portfolio of 312 positions. Lastly, FHLC is a relatively new and inexpensive option player on the field, but it more thinly traded than its older competitors.
For a more targeted approach to the healthcare sector, Johnson & Johnson also makes up a large portion of pharmaceutical sector-specific funds, including 10.0% of iShares U.S. Pharmaceuticals ETF (NYSEArca: IHE) and on 8.3% of Market Vectors Pharmaceutical ETF (NYSEArca: PPH). Both ETFs track the largest pharma companies in the industry. IHE has a 0.45% expense ratio and PPH has a 0.35% expense ratio.
Moreover, J&J believes it will sustain above-industry compound annual growth through 2019 – the industry average compound growth rate is expected to be around 3% for the period.
Looking ahead, industry growth will be propelled by a slew of niche or specialized drugs with a targeted application for specific diseases.
“From an innovation standpoint, drug companies are focusing most on specialty care,” according to Morningstar analyst Robert Goldsborough. “As a result, pharmaceutical and biotech firms are targeting smaller patient populations, particularly in oncology, virology, and immunology. Innovating in areas of previously-unmet needs should offer higher odds of approval by U.S. regulators and better pricing power for drug firms.”
For more information on the healthcare sector, visit our healthcare category.
Max Chen contributed to this article.