Economics, Patents Critical for Pharmaceuticals Innovation, Equity Prices

The S&P 500 Health Care Index is up 18% year-to-date, an admiral though not spectacular performance. While coronavirus vaccines remain a point of much discussion, pharmaceuticals stocks also fit the bill as solid though not spectacular.

However, there are still reasons to consider exchange traded funds like the Invesco Dynamic Pharmaceuticals ETF (NYSEArca: PJP). PJP is higher by almost 14% year-to-date, and better things could be in store for the fund and pharmaceuticals equities in 2022 if the economy proves sturdy and these companies are able to bolster pipelines and protect patents.

“Industry fundamentals remained intact during the pandemic, but calls to temporarily weaken or waive patent protection and questions around pricing and accessibility suggest efforts to commercialise Covid-19 treatments – including recent breakthroughs by Merck and Pfizer – may test the post-pandemic regulatory approach,” says Fitch Ratings.

PJP follows the Dynamic Pharmaceutical Intellidex Index, providing investors with a unique view on this industry. PJP’s underlying index evaluates companies based on price momentum, earnings momentum, quality, management action, and value. Dow component Merck (NYSE:MRK) and Pfizer (NYSE:PFE) combine for nearly 13% of the fund’s weight.

Pfizer is one of the leading COVID-19 vaccine manufacturers, while Merck is working on a pill that could treat the virus.

“Pfizer’s vaccine, the global leader, has increased the company’s sales, and (we estimate it will constitute 35%–40% of Pfizer’s 2021 revenue),” adds Fitch. “However, as the pandemic wanes, this revenue will decline, and the margins generated by the vaccine are lower than the company’s average margin. We expect Pfizer, in collaboration with BioNTech, to accelerate the application of the novel mRNA technology used, to create further vaccines and therapies unrelated to virology.”

While Pfizer, among others, has a leadership perch in the COVID-19 vaccine arena, other companies are working on their own treatments, underscoring the point that licensing deals could be something some PJP member firms consider going forward.

“Such licensing deals are also being discussed for Merck’s and Pfizer’s new Covid-19 treatments, which could help developing countries treat infections during the slow ramp-up of vaccination programmes and expand their capacity,” concludes Fitch.

Including Merck and Pfizer, at least five PJP components have some exposure to the race to vanquish the coronavirus pandemic. 58% of PJP’s holdings are classified as value stocks.

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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.