There's Power Lurking in This Pharma ETF | ETF Trends

Blue-chip pharmaceuticals stocks are turning solid showings this year, but the group is lagging the broader market, indicating that some of the coronavirus vaccine blush is wearing off the group.

However, some market observers see avenues for big pharma equity upside in 2022 and, if accurate, that would be constructive for exchange traded funds, such as the VanEck Vectors Pharmaceutical ETF (PPH).

PPH, which is home to 25 stocks and $341 million in assets under management, is higher by 14.37% year-to-date. That lags the broader market, but some market observers see reasons to be bullish on some of the VanEck ETF’s marquee holdings.

“Industry fundamentals remained intact during the pandemic, but calls to temporarily weaken or waive patent protection and questions around pricing and accessibility suggest efforts to commercialise Covid-19 treatments – including recent breakthroughs by Merck and Pfizer – may test the post-pandemic regulatory approach,” says Fitch Ratings.

Fitch also highlights British pharma giant AstraZeneca (NYSE:AZN), which, like Pfizer (NYSE:PFE), is a player in the coronavirus vaccine competition.

“AstraZeneca used a cost-only model and described its role as coordinator and facilitator for the commercialisation of the traditional vector technology developed by Oxford University. This reflects the significant risk-sharing by way of public development funding and take-offs during development and ahead of launch,” adds the research firm.

In order, Merck (NYSE:MRK), Pfizer, and AstraZeneca are PPH’s second-, third-, and fourth-largest holdings, respectively, combining for over 16% of the ETF’s roster. Heading into 2022, one of the critical things that pharmaceuticals companies must do (and this is always the case) is bolster product pipelines to stave off competition from generic rivals.

“Any weakening of patent protection would not immediately increase in global production capacity. However, it could threaten the industry’s innovation model. As medical research and development becomes increasingly complex, and hence risky and expensive, the threat of weakening patent protection could reduce the industry’s incentives and damage long-term innovation,” notes Fitch.

Looking at other PPH member firms, Johnson & Johnson (NYSE:JNJ) revealed last week that it’s spinning off its consumer products division with the remaining company focusing on pharmaceuticals and fast-growing medical devices. That transaction is aimed at unlocking shareholder value, and while J&J’s consumer division features some well-known brands, including Listerine, it’s a consumer staples arm and doesn’t offer the growth profile of the company’s other enterprises.

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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.