PJP - PJP: Concentrating On Large-Cap Biopharmaceuticals Seems To Be A Bad Strategy

2023-07-17 17:28:50 ET

Summary

• 55 percent of Invesco Dynamic Pharmaceuticals ETF’s investment is in ten giant-capitalized and large-capitalized biopharmaceutical stocks which delivered poor returns over the long run.
• 18 blockbuster drugs of these ten companies with an annual revenue of at least $100 billion are facing the heat of patent expiration within this decade.
• These firms are focusing on orphan drugs, revenues of which are highly uncertain, as those rare diseases generally have a limited addressable market.
• PJP also made significant investments in micro-cap stocks, which usually are believed to be alpha-generating. These stocks, too, failed to deliver returns.

~ by Snehasish Chaudhuri, MBA (Finance).

Invesco Dynamic Pharmaceuticals ETF ( PJP ) is an exchange-traded fund ("ETF") that invests in a limited number of U.S.-based pharmaceutical and biotechnology stocks. The fund is highly concentrated on different sectors, but consists of stocks from all market capitalization. Almost one-third of the portfolio consists of small-cap and micro-cap stocks. PJP has an asset under management ("AUM") of $306 million and has a high turnover ratio of 40 percent. Despite that, the fund failed to generate growth both over the short-term as well as in the long-term. The fund also has an average P/E of 20.46 and is trading almost at par value .

Invesco Dynamic Pharmaceuticals ETF was launched and is managed by Invesco Capital Management LLC. It seeks to track the performance of the Dynamic Pharmaceutical Intellidex Index, by using full replication techniques. This fund has a high expense ratio of 0.56 percent, primarily due to its high portfolio turnover. This ETF was formed on June 23, 2005 and has been paying quarterly dividends since then. However, the yield has been extremely low. Annual average yield since 2017 has been 0.88 percent. Total return has also been very poor. In 2023, PJP’s total return stood at negative 4.24 percent. Between 2016 and 2022, annual average total return stood at 3.25 percent.

PJP’s Top 10 Investment Delivered Disappointing Returns Over The Past 5 Years

These types of disappointing returns are a depiction of how these two sectors performed over the years. 55 percent of the entire portfolio is invested in 10 stocks belonging to large-cap pharmaceutical and biotechnology companies. Except Bristol-Myers Squibb Company ( BMY ), PJP invested in all other U.S.-based pharmaceuticals giants such as Abbott Laboratories ( ABT ), Merck & Co., Inc. ( MRK ), Johnson & Johnson ( JNJ ), Eli Lilly and Company ( LLY ), and Pfizer Inc. ( PFE ). Investments in large-cap biotechnology stocks included Amgen Inc. ( AMGN ), AbbVie Inc. ( ABBV ), Gilead Sciences, Inc. ( GILD ), Biogen Inc. ( BIIB ), and Regeneron Pharmaceuticals, Inc. ( REGN ). Only LLY was able to post positive growth over the past six months. Over the past five years, though performance was not that poor, only five stocks (LLY, REGN, MRK, ABT, ABBV) were able to register a compounded average price growth above 5 percent. Not surprisingly, PJP had a price CAGR of only 1.2 percent over this period.

Future Price growth of these stocks are uncertain, too, due to expected loss of revenue resulting from patent expiration of their multiple blockbuster drugs throughout this decade. ABBV’s Humira and MRK’s Keytruda generate annual sales of $20 billion and $15 billion respectively. Both drugs will become off-patent within the next five years. Some other blockbuster drugs that will become off-patent within this decade are MRK’s Januvia/Janumet, REGN’s Eylea and Dupixent, PFE’s Eliquis and Ibrance, AMGN’s Kyprolis and Prolia/Xgeva, JNJ’s Stelara and Bedaquiline, GILD’s Complera and Viread, ABT’s Dronabinol, BIIB’s Tysabri and Tecfidera, LLY’s Trulicity and Reyvow. During 2020, estimated sales of these 16 drugs was at least $100 billion.

PJP’s 17.6% Investments In Micro-Caps Delivered Disappointing Returns, Too

Pacira BioSciences Inc ( PCRX ), Supernus Pharmaceuticals Inc ( SUPN ), Geron Corp ( GERN ), Ligand Pharmaceuticals Inc ( LGND ) and Travere Therapeutics Inc ( TVTX ) are the five micro-cap stocks that consists 17.6 percent of PJP’s entire portfolio. All these micro-caps have been consistently generating poor returns. Over the past five years, not a single stock recorded positive price growth. These stocks also registered extremely poor (mostly negative) price growth over the past six months. Investing such a large portion of funds on such non-performing micro-cap pharmaceutical stocks doesn’t make sense.

The mid-caps and small-caps, however, performed much better. United Therapeutics Corp ( UTHR ), Jazz Pharmaceuticals PLC ( JAZZ ), Perrigo Co PLC ( PRGO ), Bausch Health Cos Inc ( BHC ), Prestige Consumer Healthcare Inc ( PBH ), Amphastar Pharmaceuticals Inc ( AMPH ) and Corcept Therapeutics Inc ( CORT ) constitute almost 27 percent of PJP’s entire portfolio. Barring BHC, JAZZ and PRGO, all other stocks generated strong returns throughout. Overall, PJP’s portfolio recorded a total price growth of 13.37 percent over the past five years, i.e., a compounded annual growth rate of almost 2.5 percent.

Investment Thesis

Invesco Dynamic Pharmaceuticals ETF invests in just a mere 22 U.S. based biopharmaceutical stocks. 55 percent of that investment is in 10 giant-cap and large-cap companies. Unfortunately, they delivered poor returns over the past six months. Total returns over the past five years again are disheartening. The same has been the case with the returns of PJP - consistent low yields and equally poor returns. All these 10 companies are facing the heat of patent expiration of their blockbuster drugs within this decade. 18 such drugs have an annual revenue of at least $100 billion. This gives an indication what degree of loss of revenues are awaiting them. It’s true that those companies will come up with various drugs as a revenue replacement measure, but we don’t have a clear estimate of expected revenues from their pipeline drugs.

Moreover, most of the biopharmaceutical companies are increasingly focusing on orphan drugs, which target only rare diseases. Such drugs have less competition and, once successful, can generate steady revenue streams. However, it reduces the quality of revenues, as rare diseases generally have a relatively smaller and limited addressable market. Chances of successful commercialization are also much lower than the traditional drugs.

PJP also had significant investments in micro-cap stocks, which usually are believed to be alpha-generating stocks. However, these stocks, too, failed to generate any growth both over the short-run as well as over the long-run. Only the mid-caps and small-caps in PJP’s portfolio were able to generate respectable returns over the past five years. However, the proportion of investment in these stocks is quite low, and returns are highly uncertain. In my opinion, investors should better stay away from investing in Invesco Dynamic Pharmaceuticals ETF.

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