Data indicate that inflation is easing. Add to that, the Inflation Reduction Act, which passed last year, allows Medicare to negotiate prices on some popular drugs with pharmaceutical companies. That could be a long-term positive for seniors, but pharma prices are heading higher, and that could be a benefit to a variety of exchange traded funds, including the IQ Healthy Hearts ETF (HART).
HART, which follows the IQ Candriam Healthy Hearts Index, has exposure to other sectors beyond healthcare, but the ETF provides more than adequate leverage to the trend of rising pharma prices.
That could be good news because a recent survey from Vizient confirmed that drug price inflation could approach 3.8%. While that’s modest relative to increases seen in recent years, it represents an extension of pharma prices gradually trekking higher and could signal larger increases down the road, according to the research firm.
“The forecast covering the 12 months from July 01, 2023, marks an acceleration from the actual drug price increases at 3.2% and 2.8% for the corresponding periods beginning July 2021 and 2020, respectively,” according to Seeking Alpha.
Steadily rising pharmaceuticals prices are relevant to investors considering HART because seven of the ETF’s top 10 holdings are drug makers. Beyond that group, the fund is also home to blue-chip pharma equities such as Johnson & Johnson (NYSE:JNJ) and Pfizer (NYSE:PFE), among others. Translation: HART can be a valid avenue for investors seeking pharma exposure without the burden of stock picking in the group and without the commitment of a dedicated pharma ETF.
That’s an important point because the pharma industry, though home to some robust pipelines, is also fraught with competition, particularly when it comes to generics coming to market following patent expirations.
“Stakeholders are eagerly anticipating the impact of biosimilar competition entering the market this year, but payer preference will also impact the utilization of biosimilars,” Carina Dolan, Vizient’s assistant vice president of pharmaco-economics and market insights, said in the report. “If payers designate the biosimilar and the originator product as co-preferred, we think a faster uptake of a biosimilar product is possible.”
By way of exposure to Dow component UnitedHealth (NYSE:UNH), HART offers investors some protection when generics come to market because healthcare providers and pharmacy benefits managers widely embrace generics.
Another catalyst for HART could be ongoing increases on cancer drug prices — a theme several of the ETF’s member firms are levered to.
“Cancer drugs have accounted for the largest chunk of drug expenditure, making up about 23% of Vizient’s member spend, followed by medications for autoimmune and inflammatory conditions, such as Humira and Dupixent,” concluded Seeking Alpha.
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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.