S&P: Bullish On Pharma ETFs Long-Term

Big, blue chip pharmaceuticals stocks such as Abbott Labs ABT and Dow components Johnson & Johnson JNJ, Merck MRK and Pfizer PFE are not usually sought out as growth plays. Rather, they're prized by investors as defensive, low-beta plays with solid dividends. That explains why ETFs tracking big pharma stocks lag the broader market in risk on environments and there are other issues to consider with these ETFs. Patent cliffs, slack pipelines for new drugs and political concerns are chief among the potential headlines investors in the health care space need to be aware of. Over the long-term, however, S&P Capital IQ sees favorable prospects for big pharma and has given Overweight ratings to the SPDR S&P Pharmaceuticals ETF XPH and the iShares Dow Jones US Pharmaceuticals ETF IHE in a research note published today. XPH is up 8.1% year-to-date and IHE is up 6.4%, neither of which compares favorably to an almost 11% run for the SPDR S&P 500 SPY. "Investors are also probably wary over upcoming pharmaceutical first quarter showings and possibly less favorable sales and earnings forecasts for the balance of the year, as results are likely to remain under pressure from unfavorable foreign exchange comparisons, steeper pricing pressures from European austerity measures, Japanese drug price rollbacks and patent expiration losses," S&P Capital IQ said in the note. S&P also highlighted the aforementioned political risk that funds such as XPH and IHE are facing. "In addition, U.S. health care reform legislation is expected to continue to hamper industry profitability in 2012 and 2013, primarily through price discounting in the Medicare Part D prescription drug program, and higher fees. However, we believe these drawbacks should be offset by benefits accruing from significant expansion of the market, with new coverage potentially being provided to 30 million presently uninsured Americans," the research firm said. IHE, which is home to 38 stocks, a 0.47% expense ratio and $360.7 million in AUM, features predictable lineup. Pfizer, JNJ, Merck and Abbott combine for over 34% of the fund's weight. Other top-10 holdings include Allergan AGN, Watson Pharmaceuticals WPI and Perrigo PRGO. The SPDR S&P Pharmaceuticals ETF is home to 29 stocks, a 0.35% expense ratio and $332.6 million in AUM. Pfizer, Abbott and Merck combine for about 13% XPH's weight while Allergan, Perrigo and Watson combine for about 13%. XPH also offers exposure to pharma names with more of a growth feel to them such as Questcor Pharmaceuticals QCOR, which is the fund's top holding, and Medicis MRX. In addition to being bullish on the generic/specialty drug sector, S&P likes the overall long-term prospects branded drugs. "We believe longer-term prospects for the branded drug sector remain favorable. Pharmaceuticals remain one of the widest-margin U.S. industries, with prospects enhanced by demographic growth in the elderly (which account for about 33% of industry sales) and new drugs stemming from discoveries in genomics and biotechnology. We also see longer-range benefits from cost restructurings and merger synergies," the research firm said. Other pharmaceuticals ETFs to consider include the following: The Health Care Select Sector SPDR XLV, the Vanguard Health Care ETF VHT and the Market Vectors Pharmaceutical ETF PPH. All offer exposure to Abbott, JNJ, Merck and Pfizer, but XLV is the largest and cheapest with over $4 billion in AUM and fees of just 0.18%.