Time to take the temperature of pharmaceutical shares?

Three reasons pharma stocks appear to be on the mend

Time to take the temperature of pharmaceutical shares?
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Nick KalivasThe pharmaceutical industry has lagged in recent years, due in part to political uncertainty, which has kept a lid on company share prices. Provided lawmakers can produce the votes, the proposed House and Senate health care bills could ease some of that uncertainty — setting up a possible “sell the rumor, buy the fact” backdrop, as investors move beyond market noise and focus on company fundamentals. With uncertainty already priced in, I believe that the pharmaceutical industry could finally be poised for a breakthrough if current trends hold.

Here are three potential industry catalysts:

  • The US population is aging. According the Census Bureau, the median age in the US rose to 37.9 years in July 2016, up from 35.3 years in April 2000.1 The population of Americans aged 65 years and older grew by 14.2 million between April 1, 2010, and July 1, 2016.1 I believe these demographic trends should support demand for pharmaceutical products.
  • The pharmaceutical product pipeline appears healthy. The number of Phase III trials at large US and European pharma companies has risen to include more than 200 potential drugs, leaving the industry with a robust pipeline of potential revenue.
US Pharmaceutical firms

Source: Bloomberg L.P., December 2016

  • Valuations are attractive. Pharmaceutical stocks are cheap. In fact, the PowerShares Dynamic Pharmaceuticals Portfolio (PJP), which comprises stocks of 30 US pharmaceutical companies, is trading at a discount to the S&P 500 Index and is the cheapest since 2009, when the post-financial crisis rally began.
PowerShares Dynamic Pharmaceuticals Portfolio (PJP)

Source: Bloomberg L.P., June 22, 2017

PJP is priced at just 12 times forward earnings per share — a sizeable discount to the S&P 500’s forward price-to-earnings ratio of 17.64 — while the price-to-expected sales ratio is at 2009 levels, which could pave the way for price appreciation potential.

From a technical perspective, PJP has broken out above a base established between November 2016 and early June 2017, and hints at a potential reversal of the downtrend that has been in place since the fund’s July 2015 highs.

PowerShares Dynamic Pharmaceuticals Portfolio (PJP)

Source: Bloomberg L.P., June 28, 2017

1 Source: US Census Bureau, June 22, 2017

Important information

Blog header image: Solis Images/Shutterstock.com

Forward earnings per share is a variant of a company’s earnings per share, and is calculated by dividing the company’s expected earnings over the next 12 months by its current number of outstanding shares.

Forward price-to-earnings ratio is a variant of a company’s price-to-earnings ratio, and is calculated by dividing the company’s current share price by its expected earnings, usually for the next 12 months or next full fiscal year.

Price-to-cash flow ratio is a stock’s capitalization divided by its cash for the fiscal year.

Price-to-earnings ratio measures a stock’s valuation by dividing its share price by its earnings per share.

Price-to-expected sales measures a stock’s valuation by dividing a company’s current share price by its expected sales for the next 12 months or next fiscal year.

Price-to-expected earnings measures a stock’s valuation by dividing a company’s current share price by its expected earnings for the next 12 months or next fiscal year.

There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. The fund’s return may not match the return of the underlying index. The fund is subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the fund.

Investments focused in a particular industry, such as pharmaceuticals or biotechnology and genomics, are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments.

Stocks of small and mid-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.

The fund is nondiversified and may experience greater volatility than a more diversified investment.

Shares are not individually redeemable, and owners of the shares may acquire those shares from the fund and tender those shares for redemption to the fund in creation unit aggregations only, typically consisting of 10,000, 50,000, 75,000, 100,000 or 200,000 shares.

Nick Kalivas

Senior Equity Product Strategist

PowerShares by Invesco

Nick Kalivas is a Senior Equity Product Strategist representing the PowerShares family of exchange-traded funds (ETFs). In this role, Nick works on researching, developing product-specific strategies and creating thought leadership to position and promote the smart beta* equity line up.

Prior to joining Invesco PowerShares, Mr. Kalivas spent the majority of his career in the futures industry, delivering research, strategy and market intelligence to institutional and high net worth clients centered in the equity and interest rate markets. He was a featured contributor for the Chicago Mercantile Exchange, and provided research services to a New York-based global macro commodity trading advisor where he supplied insight on equities, fixed income, foreign exchange and commodities. Nick has been quoted in the Wall Street Journal, Financial Times, Reuters, New York Times and by the Associated Press, and has made numerous appearances on CNBC and Bloomberg.

Nick has a BBA in accounting and finance from the University of Wisconsin – Madison and an MBA from the University of Chicago Booth School of Business with concentrations in economics, finance, and statistics. He holds the Series 7 and Series 63 registrations.

*Beta is a measure of risk representing how a security is expected to respond to general market movements. Smart beta represents an alternative and selection index based methodology that may outperform a benchmark or reduce portfolio risk, or both.

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