The healthcare sector hasn’t been a bad performer, per se. Year-to-date, the S&P Health Care Select Sector Index is up 13.1%, but that lags the S&P 500 by 800 basis points, confirming investors have cause to be frustrated with blue-chip pharmaceuticals and biotechnology equities.
Add to that, the third-largest sector in the S&P 500 has lagged that index by a wide margin over the past three years as biotech equities disappointed and market participants embraced growth names over defensive fare. In better news, exchange traded funds such as the VanEck Pharmaceutical ETF (PPH) could be ready for closer examination.
Helped by strong exposure to some of the leading producers of GLP-1s, also known as weight-loss drugs, PPH has been one of the standouts among healthcare ETFs. Year-to-date, the VanEck fund is trouncing the sector and over the past three years, it beat the broader market. The basic iterations of GLP-1s have been boons for some PPH components. However, there are potential catalysts that could propel the ETF as 2024 comes to a close.
Weighing PPH Prospects
Many patients have found success with weight-loss drugs. However, these aren’t perfect treatments. There are side effects such as muscle loss that could create demand for other products produced by PPH member firms.
“This muscle loss reduces patients’ core caloric needs. If patients discontinue the treatment they regain the fat but have a hard time regaining lost muscle, which puts them in a worse metabolic state than before. There is therefore an unmet medical need for next-generation drugs which either do not generate muscle loss and/or increase muscle,” noted Jon Stephenson of BNP Paribas.
Point is healthcare companies, including an array of PPH, remain innovative and they need to be due to patent expirations which open the door to competition from generic rivals. That innovation includes a deeper intersection with artificial intelligence (AI) as well as emphasis on autoimmune diseases – a massive market in its own right.
As for politics which always loom large when it comes to healthcare investing, particularly in a presidential election year, PPH member firms could see some relief because new pricing pressures from Medicare are unlikely.
“Since the Inflation Reduction Act has only recently given Medicare the power to directly negotiate drug prices, it seems unlikely that any new legislation will be passed that targets pricing,” added Stephenson.
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