Blue Chip Pharmaceuticals Shares Face Political Headwinds


The Invesco Dynamic Pharmaceuticals ETF (NYSEArca: PJP) is down 3.66% since the start of the month, and the source of this lethargy is easy to spot: the debate over drug price reform is gathering momentum, prompting investors to take a cautious approach with respect to pharmaceutical actions.

While the healthcare sector and pharmaceutical stocks in particular have a history of being susceptible to political wrangling, PJP’s recent weakness may ultimately prove to be a buying opportunity. In fact, given the current political climate, the PJP slide in September may be much ado about nothing.

“We expect Congress to struggle to push through any system that includes meaningful negotiation of Medicare prices, such as pegging prices at international prices or heavily discounted US prices (Medicaid, VA), given the pressure from more moderate Democrats in the Senate, ”said Karen, Morningstar analyst. Andersen. “The slim Democratic majority will make major changes to the healthcare system even more difficult. “

PJP, who just turned 16, tracks the Dynamic Pharmaceutical Intellidex Index. It is not an old benchmark for capitalization weighted pharmaceuticals. Rather, the underlying PJP index measures price dynamics, earnings dynamics, quality, management action, and company value. This methodology could provide some buffer for investors if the debate over drug price reform intensifies.

The recent global risk may also be beneficial, as some holdings of PJP now appear attractive in terms of valuation, with biotech giant Gildead (NASDAQ: GILD) being a prime example.

“Gilead Sciences generates exceptional profit margins with its HIV and HCV portfolio, which requires only a small sales force and inexpensive manufacturing. We believe its portfolio and pipeline supports a wide divide, but Gilead needs a stabilization of the HCV market, continued strong innovation in HIV, strong pipeline data and smart future acquisitions to return to growth, ”said Andersen.

Gilead Sciences is PJP’s second largest stake with a 6.13% weighting. Another PJP holding that has received high praise from Morningstar is Merck (NYSE: MRK), a member of the Dow Jones Industrial Average. Although Merck is not one of the pharmaceutical names exposed to coronavirus vaccines, its new drug pipeline is robust.

“Merck’s combination of a broad portfolio of high-margin drugs and a pipeline of new drugs should deliver strong returns on investment over the long term,” says Andersen. “In addition, following the divestiture of the Organon business in June 2021, Merck’s remaining portfolio holds a higher percentage of drugs with strong patent protection. On the pipeline front, after several years of only moderate R&D productivity, Merck’s drug development strategy is producing important new drugs.

Merck orders 5.75% of the list from PJP.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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