IHE iShares US Pharmaceuticals

The pharmaceutical sector has been slowly but steadily recovering from the impact of the patent cliff that had affected the performance of several companies over the past few years. The worst of the patent cliff is over and the NYSE ARCA Pharmaceutical Index is up almost 21% over the last year. So far in 2014, the index is up 8.8%.
 
Several companies which had been struggling to post growth in the face of genericization over the past few years are now on the recovery path and should see a sustained improvement in results this year. New products should start contributing significantly to results, and increased pipeline visibility and appropriate utilization of cash should increase confidence in the sector. (Read: 3 ETFs to watch as Obamacare hits deadline)
 
Collaborations, Acquisitions and Restructuring
 
Acquisitions as well as divestments will continue in the pharma sector with several companies pursuing bolt-on acquisitions, in-licensing deals and collaborations for the development of pipeline candidates. The in-licensing of promising mid-stage candidates by big pharma companies has gone up significantly – this makes sense as it helps the companies cut down on the time and cost involved in developing a product from scratch.


Therapeutic areas attracting a lot of interest include oncology, central nervous system disorders, diabetes and immunology/inflammation. The hepatitis C virus (HCV) market is also attracting a lot of attention. Generic companies are also looking towards pharma companies to boost their branded product segments. (See: Any survivors from the Biotech meltdown?)
 
Another recent trend is the divestment/monetization of non-core assets so that the companies may focus on their core areas of expertise. Biosimilars are also a focus area.
 
Restructuring activities are also gaining momentum as large pharma companies are looking to cut costs and streamline operations. Most of these companies are re-evaluating their pipelines and discontinuing programs which do not have a favorable risk-benefit profile.
 
Of late, several companies have been looking towards Ireland for acquisitions. Tax benefits are a major attraction for such deals.
 
Emerging Markets
 
The pharma industry is also targeting emerging markets for growth. However, bribery investigations on some pharma companies in China, one of the most promising emerging markets, could put a lid on near-term growth. (Read: ETF sector rotation: Industrials out, Healthcare in)
 
New Drugs to Drive Growth

Several important products gained approval last year including type II diabetes drug Invokana, Liptruzet (cholesterol), Fetzima (major depressive disorder), Imbruvica (mantle cell lymphoma), Gazyva (chronic lymphocytic leukemia), and Olysio (HCV). Drugs like Imbruvica represent strong commercial potential.
 
April should be an active month with the FDA expected to deliver a response on the approvability of experimental drugs like Eperzan (type II diabetes) and Arzerra (CLL).
 
Pharma ETFs in Focus
 
Highlighted below are some pharma ETFs - ETFs present a low-cost and convenient way to get a diversified exposure to the sector. (See all Pharma ETFs here)
 
Powershares Dynamic Pharmaceuticals ETF (PJP)
 
PJP, launched in Jun 2005 by Invesco PowerShares, tracks the Dynamic Pharmaceuticals Intellidex Index. The fund covers only health care stocks. The top 3 holdings include Johnson & Johnson (5.54%), Amgen (5.30%) and Pfizer (5.19%). The total assets of the fund as of Apr 1, 2014 were $1,157.9 million representing 29 holdings. The fund’s expense ratio is 0.63% while dividend yield is 0.41%. The trading volume is roughly 162,395 shares per day.
 
SPDR S&P Pharmaceuticals ETF (XPH)
 
XPH, launched in Jun 2006, tracks the S&P Pharmaceuticals Select Industry Index. This ETF has a mix of pharma and biotech stocks with the top 3 holdings being Horizon Pharma Inc. (3.80%), Questcor Pharmaceuticals, Inc. (3.79%) and Johnson & Johnson (3.65%).
 
Total assets as of Apr 1, 2014 were $868.66 million representing 36 holdings. The fund’s expense ratio is 0.35% and dividend yield is 0.66%. The trading volume is roughly 78,086 shares per day.
 
iShares U.S. Pharmaceuticals (IHE)
 
IHE, launched in May 2006, seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones U.S. Select Pharmaceuticals Index. The fund mainly consists of pharma companies (99.87%). Short term securities and other/unidentified investments account for 0.09% and 0.04% of the fund, respectively.
 
The top 3 holdings of this fund are large-cap pharma companies are Johnson & Johnson (12.82%), Pfizer (10.79%) and Merck (9.46%). The total assets of the fund as of Apr 1, 2014 were $669.7 million representing 38 holdings. The fund’s expense ratio is 0.45% with the dividend yield being 0.77%. The trading volume is roughly 28,260 shares per day.
 
Market Vectors Pharmaceutical (PPH)
 
PPH was launched in Dec 2011 and tracks the Market Vectors U.S. Listed Pharmaceutical 25 Index. The top 3 holdings of this fund are large-cap pharma companies - Johnson & Johnson (9.44%), Novartis (8.98%) and Pfizer (7.40%). The total assets as of Apr 2, 2014 were $311.5 million representing 26 holdings. While the expense ratio is 0.35%, dividend yield is 1.80%. The trading volume is roughly 39,089 shares per day.
 
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ISHARS-US PHARM (IHE): ETF Research Reports
 
PWRSH-DYN PHARM (PJP): ETF Research Reports
 
MKT VEC-PHARMA (PPH): ETF Research Reports
 
SPDR-SP PHARMA (XPH): ETF Research Reports
 
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