Healthcare is arguably the most politically sensitive sector. At the very least, it’s part of that group, and with lower drug prices being an issue with some bipartisan momentum, investors are right to ponder the effects of recent legislation on the healthcare sector.
Some surveys indicate market participants are bullish on drug prices for 2023, indicating there may opportunity with exchange traded funds such as the Invesco S&P 500® Equal Weight Health Care ETF (RYH). RYH, which follows the S&P 500® Equal Weight Health Care Index, is relevant in the drug price vs. investing outcomes conversation due in large part to the fact that is an equal-weight fund.
As such, RYH isn’t excessively allocated to any one of its 66 components. In fact, its largest holding accounts for just 2.26% of the fund’s roster and isn’t a biopharma. Still, the $1.03 billion RYH offers more than adequate leverage to potential upside by biopharma equities, and that could be a good thing this year.
“The outlook for drug prices is an ongoing source of anxiety for biopharma investors. In contrast to this fear, we believe that U.S. drug prices will continue to increase because the innovation that many medications provide offers a real benefit to patients. As long as biopharma continues to deliver these innovative products, we see no change in the upward trend in drug prices,” noted Cowen.
The research firm surveyed 26 large-scale healthcare outfits, including hospitals, that purchased more than $90 billion worth of pharmaceuticals last year, or about 40% of the total sold in the U.S. While politicians are working to lower drug prices, the Cowen survey could signal that investors don’t need to eschew biopharma stocks because of that political effort.
“This year’s sample of purchasers, who responded to our survey in December 2022, anticipated that brand drug acquisition cost per unit would increase by an average of 8% over the next three years. This is slightly higher than last year’s forecast and may be the continuation of a trend back toward expectations for double-digit price increases,” according to the research firm.
Another point in favor of RYH is that the fund allocates about a quarter of its weight to biotech and pharmaceutical companies, some of which are innovators that are developing new therapies. When new drugs are approved, many are expensive.
“Nineteen percent of respondents attributed a substantial (75%) portion of the anticipated increase over the next three years to a mix shift to higher-priced, newer therapies vs. 8% last year. Only one respondent, representing just 1% of drug spend amongst surveyed payors, predicted a decline in drug prices over the next three years,” concluded Cowen.
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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.