Pharmaceuticals stocks and the related exchange traded funds are turning solid performances in 2021. Investors looking for quality and growth traits might want to continue leaning on this corner of the healthcare sector in 2022.
With that in mind, investors might want to evaluate the VanEck Vectors Pharmaceutical ETF (PPH) as a 2022 industry play. Home to a cadre of blue-chip pharmaceuticals equities, PPH jumped 3.1% last week — perhaps a sign of things to come in the new year.
Predictably, COVID-19 vaccinations will figure prominently into the PPH equation in 2022, but there’s more to the story.
“Fitch Ratings expects the global pharmaceutical & biotech industry to build upon its strong innovation momentum displayed in its Covid-19 response. Partnership models established across key parts of the industry’s value chain, such as research & development (R&D), supply and manufacturing, will accelerate,” says the research firm.
PPH is home to several coronavirus vaccine makers, including Pfizer (NYSE:PFE), AstraZeneca (NYSE:AZN), and Johnson & Johnson (NYSE:JNJ). However, vaccine exposure is largely priced into these names and others, meaning that innovation remains pivotal to investors’ long-term outcomes with PPH and pharmaceuticals stocks.
“The sector’s defensive qualities are underpinned by its strong innovation pipeline, combined with still significant unmet medical needs, steady demand from growing and ageing populations and improving healthcare access globally,” notes Fitch.
In fact, it’s integral that PPH components bring something new to the table in 2022 because vaccine supplies are expected to increase, which will likely lead to decreasing scarcity premiums.
“Fitch estimates that vaccine supply shortages will abate from 2Q22, shifting the focus in the global vaccination effort to the efficient delivery and administration of vaccines in weaker emerging-market healthcare systems. The rating Outlooks of two leading Fitch-rated vaccine manufacturers, Pfizer (A/Stable) and AstraZeneca (BBB+/Positive), will be influenced by how the companies incorporate continued vaccine efforts into their different economic models,” says the ratings agency.
Pfizer and AstraZeneca combine for about 11.5% of PPH’s roster. In some good news from the perspectives of income and quality, PPH components are likely to sport tidy balance sheets in 2022, perhaps fostering elevated dividends.
“We project healthy free cash flow generation that will improve for many companies as recent innovations achieve critical mass and mature, while generics business models benefit from recent investments in scale and lower-cost production. We do not expect immediate pressure to increase shareholder returns in the sector, but this may build for some issuers over time if there are no suitable investment opportunities for external growth,” 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.
