Pharma Sector Steps up as a Portfolio Prescription

Hope Springs Eternal

Hopes of a return to normality are increasing after a year of pandemic-induced tumult. News that COVID-19 vaccines developed by Pfizer and BioNTech, and Moderna were more than 90% effective in clinical trials lifted global stock markets, with health care stocks outpacing the gains in the U.S., Asia and Europe over the week (see Figure 1). The level of efficacy was much higher than the 70% that many had hoped for, raising expectations that vaccinations could help boost the sluggish global economy, and provide a way out of the pandemic.

Figure 1: Market performances (Total returns, rebased)

Source: Factset. As of 16 November 2020. The above chart represents past performance of various indices and not the fund. Index performance is not illustrative of the fund’s performance. You cannot invest directly in an index. Index returns assume dividends are immediately reinvested and exclude management fees and costs incurred when investing in the fund. Past performance of the indices is not a reliable indicator of guarantee of future performance of the fund.

Bright prospects

The vaccines present a big opportunity for pharmaceutical firms such as Pfizer, one of the top 10 holdings in the VanEck Vectors^® Pharmaceutical ETF (PPH^®). The U.S. pharmaceutical giant, which is developing the vaccine in partnership with Germany’s BioNTech, expects to produce globally up to 50 million doses this year and over one billion doses in 2021,¹ subject to clinical success and regulatory authorization. Sales for the vaccine are estimated at US$3.5 billion next year before steadying at US$1.4 billion annually.

The possibility of a divided U.S. Congress may further propel the pharmaceutical sector, benefiting pharmaceutical ETFs. Although both Democrats and Republicans are supportive of drug pricing and reimbursement reform, the prospects of big changes to government health plans are lower if there is a policy gridlock.

Meanwhile, third-quarter results from the pharmaceutical sector has been upbeat so far, with almost 90% of the companies reporting better-than-expected revenues and earnings. Analysts expect the momentum to continue, with industry estimates from Factset (see Figure 2) projecting earnings growth over the next couple of years.

A growing, ageing and richer global population will further boost demand for improved biotechnology and healthcare. Technological advancements such as the increased use of artificial intelligence and online doctors, and evolving care models may also ensure a long tailwind for the sector.

Figure 2: Healthcare earnings outlook

Source: Factset. Data as of 18 November 2020.

VanEck Vectors Pharmaceutical ETF (NASDAQ: PPH)

Instead of investing in individual companies, one of the easiest ways to invest in the healthcare sector is via the VanEck Vectors Pharmaceutical ETF (NASDAQ: PPH). PPH provides exposure to 25 of the largest pharmaceutical and distribution companies in the world by tracking the MVIS US Listed Pharmaceutical 25 Index. U.S. drugmakers make up slightly more than 65% of the portfolio, while the remainder of the exposure (~35%) is in other healthcare companies in Europe, Israel and Japan. In terms of charges, the fund’s expense ratio of 0.36%² is much lower than some of the fees levied by its peers for similar funds.³

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Key points about PPH:

• An ETF to play on the potential growth of the pharmaceutical sector.
• Provides exposure to some of the world’s largest pharmaceutical companies that are well positioned to benefit from long-term growth in the industry.
• Obtaining access to these leading companies doesn’t come at a high cost. PPH’s expense ratio is among the lowest compared to the charges levied by its peers for similar funds.⁴