Healthcare, the second-largest sector allocation in the S&P 500, is often viewed through the lens of defensive and value traits. The latter scenario is being amplified this year, as the S&P 500 Health Care Index is lower by 3.8%. Some healthcare industry groups, including pharma, are performing more poorly than the sector at large.
That’s the bad news, but the silver lining could be that some high-quality biopharma equities are trading at discounted valuations, perhaps highlighting value opportunity with exchange traded funds such as the Invesco Pharmaceuticals ETF (PJP).
Home to nearly $272 million in assets under management, PJP follows the Dynamic Pharmaceutical Intellidex Index. That benchmark’s methodology is pertinent in discussing the fund as a value opportunity because value, along with price momentum, earnings momentum, quality, and management action, are among the factors used to build the gauge.
Lay of Pharma Land
Several PJP member firms face patent cliffs on marquee products over the next several years. But biopharma companies remain inventive and some have ample long-term tailwinds.
“For example, we see firms beginning to focus more on biologics (which have a longer protection from negotiation than small molecules do) and on rare disease and immunology therapies that treat younger patients covered by private insurance (rather than products that treat older patients who may be covered by Medicare),” noted Morningstar analyst Karen Andersen.
Among PJP holdings that appear attractive on valuation, Gilead Sciences (NASDAQ: GILD) is one of the standouts. The shares account for 5.93% of the ETF’s roster. Importantly, the company has roughly another decade of patent protection on Biktarvy, its TAF-based HIV therapy. Plus, Gilead has a solid product pipeline
“In oncology, the Forty Seven acquisition (magrolimab) looks unlikely to pay off, although we remain bullish on the Arcus collaboration, which has brought multiple immuno-oncology drugs into late-stage trials. In HIV, we’re also bullish on Sunlenca’s potential both as an every-six-month prophylaxis as well as part of an oral or injectable HIV treatment regimen in the long term,” added Andersen.
Pfizer (NYSE: PFE), which accounts for 5.22% of the PJP roster, is another value idea. Slumping COVID-19 vaccine sales are a potential headwind. But the company, like Gilead, has a solid development pipeline that could be supportive of long-term upside.
“Pfizer’s late-stage pipeline includes several drugs with peak sales potential of above $1 billion annually, but fewer major blockbusters than we would expect for a firm of this size,” concluded Andersen.
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