Health Care Europe (HLT) : Better and better

The Lyxor HLT ETF (UCITS), created in 08/2006 is listed in Euro on Euronext and reproduces the Stoxx600 Healthcare Europe index which is made up of the 49 main European stocks in the sector, It should be noted that non-eurozone stocks represent 68% of the index which is not insignificant given the potentially significant fluctuations of the £ and CHF against the Euro.

The fees of this ETF are 0.3% in the average of our selection and the AUM is approximately € 244m. The replication method is indirect (via a swap) and the distribution method is capitalized. This ETF is eligible for P.E.A.

Alternative ETFs: SYH (BNP THEAM Euro), CH5 (Amundi Euro).

Latest developments

The ETF HLT rose by 4.8% in 2017, well below the Stoxx600NR (10.6%) and has so far posted a performance of + 1.1% since the beginning of the year (against + 1.6% for the stoxx600NR).

The performance of the index is mainly driven by the English pharmas, primarily Glaxo Smithkline (+ 19.7%) and Astrazeneca (+ 9%) because of positive datas on certain molecules, while the two Swiss giants Novartis (-9 %) and Roche (-13%) are lagging due to price pressure on a number of molecules due to generics, as well as growing uncertainties in the US market after D. Trump's statements on drugs prices that seem to announce upcoming restrictive measures.

On the other hand, multiples are attractive at 17x 2018 earnings, with expected earnings growth around 8%.

 

Index & components

The two major Swiss pharmaceutical stocks (Novartis and Roche) account for around 28% of the capitalization.

The five largest stocks are in addition to the two Swiss stocks: Glaxosmithkline, Novo Nordisk and Sanofi, which account for 52% of the index. Market capitalizations are also enormous: more than CHF 200 billion for Roche and Novartis, while the following 3 are around € 100 billion; this is a very important factor of inertia and offsets the relative narrowness of the index.

We also note that the overwhelming majority of companies that make up the index are pharmaceuticals, with the exception of Essilor (Ophthalmic Lenses) and Fresenius (Healthcare Facility), so we view HLT essentially as an ETF pharma Europe.

The pharmaceutical index is not very volatile, because of the weight of its constituents as well as because of a proven defensive profile, which is explained by the fact that the discovery of molecules and their distribution is little related to economic cycles, while that in developed countries medicines are reimbursed by mutuals or by the State. In addition, health is a growth sector whose main drivers are innovation and growing markets linked to the pathologies of the developed world (aging and diabetes), as well as new viruses and antibiotic resistance. In addition, emerging markets are an important market for the European pharmaceutical industry.

The sector is facing the increasing maturity of molecule portfolios, price pressure in some areas (eg diabetes) and state budget efforts to reduce health costs. The solution lies in the innovation and partnerships / buyouts of biotech companies that should accelerate in the coming months-because valuations have become attractive again-with the key to new molecules with high potential to boost existing portfolios.

Large tax-motivated mergers seem to have long been buried since the failure of the AstraZeneca / Pfizer operation, but the consolidation of the sector was also triggered by US regulatory uncertainties during the campaign about lowering drug prices. The multiple failures of the Trump administration to reform the Obamacare adds a significant level of uncertainty on drug reimbursements, which affects the visibility of the sector.