For much of 2020 and 2021, the pharmaceutical stock investment thesis revolved around development and disbursement of coronavirus vaccines.
While that made for an obvious catalyst, and a rewarding one at that, the effects of the COVID-19 vaccine status as an accelerant for pharma equities waned this year. Fortunately, exchange traded funds such as the VanEck Vectors Pharmaceutical ETF (PPH) feature rosters that are chock full of quality companies with multiple traits that could power 2023 rebounds.
Looking ahead, some market observers are forecasting that pharma equities can rally in a post-COVID healthcare investment landscape on the back of factors such as innovation, expansion of generic offerings, and consumer health products.
“This follows the simplification of business models established by Pfizer and GSK that focused on core innovation. We expect a similar strategic refocus could be implemented at Novartis, which has already expressed its desire to separate its generic and innovative pharma businesses, and streamline its research efforts. We also expect Sanofi to continue its repositioning towards specialty pharma over the medium term,” noted Fitch Ratings.
Pfizer (NYSE:PFE), Novartis (NYSE:NVS), and Sanofi (NYSE:SNY) combine for over 14% of the PPH portfolio. GlaxoSmithKline (GSK) isn’t among the ETF’s 25 holdings.
Another factor pharma investors will want to stay abreast of next year is increased mergers and acquisitions activity, which is widely expected following a couple of years of lethargy on that front. With many large-cap pharma names, including some PPH components, facing patent cliffs in the coming years and rising generic competition, it makes sense for some to put cash to work by acquiring smaller rivals with robust product pipelines.
“We also expect active portfolio management within companies’ divisions, including targeted M&A and partnering opportunities, but also divestments of tail-end drugs and brands to free up resources for innovation. In our view this will continue to offer significant investment opportunities in the mid-cap pharma market, attracting significant private equity capital, particularly in consolidating European market,” according to Fitch.
The bulk of PPH’s member firms carry credit ratings that are well into investment-grade territory. More importantly, the firms have the capital to not only service debt obligations, but fund and grow dividends — an important factor for long-term investors.
“Most Fitch-rated global pharma companies enter 2023 with comfortable rating headroom. This not only reflects benefits for issuers involved in the pandemic response (including treatments and vaccines), but also the business model specialisation, which has led to a simplification of businesses, often raising disposal proceeds and increasing financial flexibility,” concludes Fitch.
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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.
