PPH ETF: Question & Answer

Introduction

Despite the current uncertainty in equity markets, the pharmaceutical industry has remained relatively stable, thanks to the consistent and growing demand for the products pharma companies produce. The global pharmaceutical market is expected to grow at a 15.9% CAGR from 2022 to 2030, reaching $1.599T by 2030.¹ The existing industry leaders are projected to retain and gain share as patents protect their existing intellectual property and companies continue to develop new drugs and vaccines. This blog intends to answer frequently asked questions on the pharmaceutical industry and, more specifically, VanEck’s Pharmaceutical ETF (PPH).

• What is the general outlook for the pharmaceutical industry?
• Why invest in pharmaceutical companies now?
• How recession-proof is the pharmaceutical industry?
• What impact did the Inflation Reduction Act (IRA) have on the pharmaceutical industry?
• Does PPH offer domestic or global exposure?
• How is the index constructed?
• How can investors buy VanEck ETFs?

What is the general outlook for the pharmaceutical industry?

The pharmaceutical sector’s growth has largely been attributed to new, proprietary drug development and rising demand for healthcare.

Between 2008 and 2012, 28 new drugs were approved by the FDA’s Center for Drug Evaluation and Research (CDER). That number rose over 80% to 51 approvals per year between 2017 and 2021. Manufacturers of pharmaceuticals can generate an average of $18.6B in global revenues per new drug launch. The average cost of this new drug development has been roughly $2.6B.² Between the rising number of new drug approvals and the wildly impressive profit margins on these new pharmaceuticals, there are considerable growth opportunities for the sector.

Annual approvals of new drugs by the FDA's CDER

Source: Statista, AHIP, Journal of Health Economics. As of 1/31/2022.

The rising demand portion of the story can primarily be attributed to the aging population that persists. By 2050 the number of people in the US over the age of 60 is projected to double to roughly 2 billion. Since most of the demand for pharmaceuticals comes from the older segments of the population, this aging population is projected to contribute materially to the increased demand over the coming decades.

U.S. Population Distribution

Source: United States Census Bureau, Center of Disease Control, Bayer. As of 12/31/2018.

Why invest in pharmaceutical companies now?

Analysts anticipate another shaky year for equity markets in 2023, making defensive and value plays relatively attractive for those interested in pursuing capital appreciation and dividend income. A primary characteristic of the pharmaceutical industry is the inelasticity of demand for pharmaceuticals. Large-cap pharmaceutical companies that can retain consistent earnings and continue to pay healthy dividends tend to be rewarded when there is high volatility in the global equity markets.

How recession-proof is the pharmaceutical industry?

No industry is entirely immune to economic downturns, but the pharmaceutical industry has historically maintained strong sales during these periods. This is primarily due to the inelasticity of demand for the pharmaceuticals these companies produce. Additionally, many drugs have long patent lives, which can provide a steady revenue stream for pharmaceutical companies even during periods of declining economic growth.

What impact did the Inflation Reduction Act (IRA) have on the pharmaceutical industry?

The IRA introduced a new requirement for pharmaceutical companies to adhere to regarding rising drug prices. Companies that manufacture pharmaceuticals are now required to pay rebates for drugs in Medicare Part D when price increases exceed inflation. This portion of the IRA was enacted in October 2022.³

Does PPH offer domestic or global exposure?

The VanEck Pharmaceutical ETF only invests in US-listed companies. With that, a fair amount of companies in the investable universe are US-listed, but their operations are not based in the United States. Novo Nordisk (NYSE: NVO), Haleon PLC (NYSE: HLN), and AstraZeneca (NASDAQ: AZN) all have their operations based in Europe but have US-listed securities that are currently held by PPH.

How is the index constructed?

The VanEck Pharmaceutical ETF (PPH^®) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS^® US Listed Pharmaceutical 25 Index (MVPPHTR).

In order for a security to be considered part of the investable universe, it must have a full market cap of at least $150M, a 3-month ADV of at least $1M at current and past 2 reviews, at least 250,000 shares traded per month over the past 6 months at current and past 2 reviews and companies must generate at least 50% of revenues from the research, development, production, marketing and/ or sales of pharmaceuticals (excluding pharmacies). The index's components are reviewed semi-annually in March and September. Rebalances occur quarterly in March, June, September, and December.

During the review, the largest 50 stocks by full market cap from the investable universe qualify. Those 50 stocks are then ranked by 3-month ADV in descending order and by free-float market capitalization in descending order. Those 2 rankings are then added, and the 10 highest-ranked companies are automatically included in the index. The remaining 15 companies are selected between those companies given a rank between 11 and 40. It should also be noted that company weightings are capped at 20%.⁴

How can investors buy VanEck ETFs?

Learn more here.

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