Experienced healthcare investors know several important facts regarding large-cap, blue-chip biopharma companies.
First, these firms enjoy a limited amount of time when their blockbuster drugs corner a specific niche. Then, patent protections expire and generic competitors can join the party. Second, that creates pressure to ensure that pipelines are full with new potential blockbusters. Third, one of way of accomplishing that goal is through mergers and acquisitions.
All of that is to say that innovation in the healthcare sector is critical. Clinicians, investors, and patients realize as much. Among exchange traded funds, the ARK Genomic Revolution ETF (ARKG) is arguably a bastion of healthcare innovation, perhaps making an appropriately timed option for investors looking to skirt some of the aforementioned issues facing old guard biopharma firms. Consider the case of sales lost to generic competitors.
“Over the next five years, we expect erosion in sales from expired or expiring patents to result in a $100 billion headwind. We do think this loss will be roughly matched by growth of other approved drugs as they expand market share and gain approval in new indications. Growth will be determined by the contribution from pipeline products,” according to Morningstar.
Importantly, ARKG is actively managed, meaning the fund can be swift to alter allocations to capitalize on critical trends in the healthcare sector. Those include rising demand for breast and blood cancer treatments and more broad oncology fare. In fact, cell therapy and gene-based approaches — concepts some ARKG member firms address — are viewed as critical drivers of oncology advancements.
“In oncology, industry investment has been high owing to significant unmet need and strong pricing power. IQVIA forecasts oncology as the fastest-growing area of drug spending, with double-digit growth pushing spending up to $377 billion in 2027 (from $193 billion in 2022),” added Morningstar.
ARKG is a relevant choice for tactical healthcare investors for another reason: Its components aren’t reliant on coronavirus vaccines to drive top-line growth. While that trait worked against the ETF in 2021 and last year, it could be a positive going forward because data indicate waning appetite for COVID-19 vaccines. That diminished demand likely means lower revenue for producers.
“We expect the nearly $100 billion vaccine market to contract in 2023 because of less need for COVID vaccines but then steadily increase. Despite the remarkable speed to market for COVID vaccines, vaccine development tends to take several years longer than drug development, and manufacturing is much more complex, which generally leaves only one or two vaccines per market,” concluded Morningstar.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.