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3 Pharma Mutual Funds Beating the S&P 500

Abhijit Ghosh

The Health Care Select Sector SPDR ETF (XL.V) recorded 40.5% jump last year as compared to Standard & Poor 500’s (.INX) 31% jump. The sector has also outperformed S&P 500 on a year-to-date basis. While Health Care Select Sector SPDR has gains of 1.4%, the S&P 500 is now down 0.8% year to date.

Moreover, the NYSE ARCA PHARMACEUTICAL INDEX (^DRG) has gained 3.9% so far this year. The pharmaceutical sector has been steadily recovering from the impact of the patent cliff being faced by several companies over the past few years. Going forward, new products are most likely to start contributing significantly to results, and increased pipeline visibility and appropriate utilization of cash should increase confidence in the sector.

Thus, it does sound a promising investment area. Health-care ETFs have pulled in most deposits among others this year. According to Bloomberg, about $3.98 billion have been invested since Jan 1 till Apr 8. However, biotech sector suffered selling pressure in the last half of March.

Biotech Selloff

The biotech stocks tumbled in the closing weeks of March and on certain days this month as well. The selloff was a result of a letter issued to Gilead Sciences Inc. (GILD) questioning its pricing of the newly-approved hepatitis C virus (:HCV) treatment, Sovaldi. This sparked concerns that lawmakers may compel biotech companies to cut prices of their drugs which in turn would affect their results.
On Apr 4, iShares Nasdaq Biotechnology ETF saw the biggest withdrawal since 2001. Bloomberg reported 7.5% reduction in total assets of this biggest biotech-focused ETF.

We believe the concern was exaggerated. Sovaldi is the new HCV treatment on the block and should see strong demand until an improved treatment enters the market. The product remains on track to gain blockbuster status and Gilead’s first quarter results should lay rest to concerns.
Strong pipelines, innovative treatments and impressive results are still the catalysts that should boost the biotech sector going forward.

Positives in Pharma Sector

Mergers & Acquisitions: The pharma sector witnessed major M&A activity over the last couple of years. Going forward, we expect small bolt-on acquisitions to continue. In-licensing activities and collaborations for the development of pipeline candidates have also increased significantly.
Restructuring: Restructuring activities are also gaining momentum as large pharma companies are looking to cut costs and streamline their operations. Most of these companies are re-evaluating their pipelines and discontinuing programs which do not have a favorable risk-benefit profile.
Emerging Markets: Another trend seen in the pharmaceutical sector is a focus on emerging markets. Companies like Mylan, Pfizer, Merck, Eli Lilly, Glaxo and Sanofi are all looking to expand their presence in India, China, Brazil and other emerging markets

New Products: 2013 saw the FDA approving 27 novel medicines, about one-third (33%) of which were identified by the FDA as “First-in-Class,” meaning they use a new and unique mechanism of action for treating a medical condition. Some drugs that have gained approval this year so far include AstraZeneca’s Myalept (complications of leptin deficiency) and Farxiga (type II diabetes), Chelsea Therapeutics’ Northera (to treat neurogenic orthostatic hypotension), BioMarin’s Vimizim (Morquio A syndrome) and Vanda Pharma’s Hetlioz (non-24- hour sleep-wake disorder).

3 Pharma Funds to Buy

Given the positives ahead it is a favorable time for investors to add some pharma mutual funds. Let us zero-in on funds that sport a Zacks Mutual Fund Rank #1 (Strong Buy). Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.

Fidelity Select Biotechnology (FBIOX) seeks capital growth. It invests the majority of its assets in companies involved in the research, manufacture and distribution of biotechnological products, services, and processes. The fund may also invest in foreign or domestic companies that may gain from scientific or technological developments.

The fund has returned 4.79% year to date. Total assets stand at $9.39 billion. The fund has an expense ratio of 0.79% as compared to category average of 1.44%.

Fidelity Select Health Care (FSPHX) invests the majority of its assets in companies whose principal operations include production, design and sales of health care related products or services. The fund focuses on acquiring common stocks and purchases both domestic and foreign securities.
The fund has returned 8.23% year to date. Total assets stand at $5.90 billion. The fund has an expense ratio of 0.78% as compared to category average of 1.44%.

Vanguard Health Care Fund Admiral Shares (VGHAX) invests a lion’s share in companies involved in production, or distribution of health care products and services. The companies comprise hospital and health care facilities, pharmaceutical companies, and medical supply firms.

The fund has returned 4.52% year to date. Total assets stand at $37.08 billion. The fund has an expense ratio of 0.30% as compared to category average of 1.44%.
Read the analyst report on FBIOX

Read the analyst report on FSPHX

Read the analyst report on VGHAX

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