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  • Stock Deconstruction
  • disruptive innovation
  • genome editing

What are the healthcare ETFs to watch?

Healthcare stocks have outperformed the broader market since the coronavirus pandemic began. The Vanguard Health Care Fund ETF [VHT] has grown 19.4% in the past year, through 10 February and is up 5.5% so far in 2021. In comparison, the S&P 500 has climbed 16.44% in the last 12 months and 5.65% for the year to date.

Despite its recent performance, the healthcare sector is generally considered to be a boring option for many investors. It isn’t glossy or shiny, and it doesn’t offer high growth returns like electric vehicles or clean energy stocks.

But the sector isn’t going anywhere. Once the pandemic is over, it’s sure to take a more central role, especially as companies increasingly turn to technology to improve the delivery of healthcare products and services. The sector has also proven itself to be robust during the past two financial crises.

 

Vaccine rollouts and new treatments

With global vaccine programmes starting to be rolled out, both Pfizer [PFE] and AstraZeneca [AZN] should perform well in the months ahead. The uncertainty surrounding how long protection lasts means millions more doses may need to be ordered by governments in 2022 and beyond.

In its fourth quarter 2020 earnings report, Pfizer announced it had generated $154m in sales from its COVID-19 vaccine by the end of last year and expects sales to total $15bn in 2021 versus the $12.7bn FactSet consensus estimate. Despite the projected sales figures, Pfizer had a mixed quarter overall.

 

$15billion

Pfizer's expected 2021 sales

 

While Pfizer’s oncology business was the best performer in the fourth quarter — growing 23% year-over-year to $3.02bn — in October the company announced it had hit a stumbling block in a late-stage study of a breast cancer treatment. Pfizer’s share price has remained relatively flat since then, although it hit a 52-week high in December after the US Food and Drug Administration (FDA) voted to authorise the company’s vaccine candidate.

In a note to clients, seen by Barron’s, Louise Chen, an analyst at Cantor Fitzgerald, was cautiously bullish on Pfizer’s outlook.

“Despite the mixed quarter, we are confident that [Pfizer] can meet its guidance for a five-year revenue CAGR of at least 6% or higher with the COVID-19 vaccine, which is above our ~4% estimate for the industry average,” wrote Chen. “Sales growth should be driven by solid execution and innovation.”

Gilead [GILD]’s most recent quarterly earnings were boosted by sales of its Remdesivir treatment for COVID-19 patients. Sales of the treatment — known as Veklury — reached $1.9bn, while total revenue was $7.4bn, up 26% year-over-year. Gilead expects that Veklury will be needed until at least the end of 2021.

 

Cell therapy and gene editing

COVID-19 has presented clinical trials for new treatments with a massive challenge and, in some cases, led to delays in studies but, despite this, companies including Fate Therapeutics [FATE] have had a surprisingly strong year. The stock has been one of the sector’s standout performers, rising 281% in the last year (through 10 February’s close) and 15.2% so far this year. As of 10 February, Fate Therapeutics’ share price was trading 14.7% down from its intraday high of $121.16, which it reached on 14 January.

Fate Therapeutics uses clever techniques to develop immunotherapies from stem cells. Its FT516 NK product, which targets B-cell lymphoma, currently offers a lot of promise. In a recent note to clients, seen by The Fly, Benjamin Burnett, director at Stifel Financial Corp, acknowledged that there has so far been limited data on the progress of FT516 NK, but he expects there will be “a high probability of success” when results of studies are most likely released later this year.

Also propping up the company’s recent performance has been a partnership with Janssen, a subsidiary of Johnson & Johnson [JNJ], to create cancer immunotherapies. Fate Therapeutics received $100m upfront, but the deal could end up being worth more than $3bn if milestones are reached and targets achieved.

Innovation in these therapies is happening at a rapid pace and they will only advance further in the coming years. For investors looking to gain exposure to the wider biotech theme, the ARK Genomic Revolution ETF [ARKG] covers therapeutics, gene editing and CRISPR. As of 10 February, Fate Therapeutics was the tenth holding on the ETFs list, weighted at 3.28%. Among the top three were gene sequencing company Pacific Biosciences [PACB], making up 6.41% of the fund, and synthetic DNA manufacturer Twist Bioscience, which had a weighting of 5.06%. Both stocks have registered impressive gains in the past year, and have helped the ARK Genomic Revolution ETF to climb 207.51% in the past 12 months and 18.72% since the start of 2021 (as of 10 February’s close).

 

Medical devices and home testing kits

Another subsector of the healthcare theme witnessing something of a technological revolution is medical devices. The iShares US Medical Devices ETF [IHI] has climbed 26.6% in the last year (through 10 February), outperforming the broader sector. So far in 2021, it is up 4.6%.

Abbott Laboratories [ABT] is the top holding for the fund (as of 10 February’s close). The $1.3bn market cap medical devices and healthcare company makes up 14.36% of the ETF. The company’s share price has been on an upward trajectory throughout the past 12 months and has performed well so far in 2021, climbing 14.9% for the year to 10 February.

In its third quarter earnings, reported at the end of October, Abbott Laboratories saw revenue from its diagnostics segment grow 38% year-over-year to $2.64bn. Sales of COVID-19 testing kits totalled $881m.

 

38%

Abbott Laboratories' diagnostics segment's Q3 YoY growth

 

The company has built two new US manufacturing facilities to meet demand for the kits and Robert Ford, CEO of Abbott Laboratories, has said he expects that the kits will be needed for some months yet. He anticipates that regular testing could be on the cards if COVID-19 ends up being seasonal like the flu.

Analysts at Raymond James believe that as the healthcare sector adjusts to COVID-19 and the burden on healthcare services gradually eases, Abbott’s other segments should get a boost, including its medical devices.

“Abbott remains one of the more attractive growth stories in large-cap healthcare with a diversified portfolio that addresses various end markets and geographies,” the analysts wrote in a note seen by The Motley Fool.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

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