Why Pharmaceutical Stocks Are Crushing the Market [Chart]

Pharmaceutical stocks have crushed the broader markets in 2015.

The S&P Pharmaceuticals Select Industry Index has climbed 20.9% year to date. In the last 12 months, the index has climbed 42.5%.

Pharmaceutical ETFs have soared as well.

The iShares Dow Jones U.S. Pharmaceuticals ETF (NYSE Arca: IHE) has climbed 20% in 2015 and 37.5% in the last 12 months. The SPDR S&P Pharmaceuticals ETF (NYSE Arca: XPH) is up 21% in 2015 and 35.9% in the last year.

Those numbers look particularly strong when you compare them to the broader markets. In 2015, the S&P 500 has gained just 2%. The Dow Jones Industrial Average has performed even worse, dipping 0.8% this year.

So why are pharma stocks outperforming the markets so drastically in 2015? Spending on pharmaceuticals is growing at an incredible rate – take a look…

Pharmaceutical Stocks Soar on Increased Spending

In 2014, more than $374 billion was spent on prescription drugs in the United States, according to a report from the IMS Institute of Health. That was a 13.1% jump from 2013, and the highest growth rate in more than a decade, says ExpressScripts.

Here's a look at how U.S. prescription spending has grown in the last decade:

Most of the spending increase has come from specialty drugs, which are often accompanied by high price tags. The average price of cancer drugs in the United States reached $100,000 per year in 2012, according to the Mayo Clinic. Newer medications regularly top $150,000 per patient per year.

And for many specialty drugs, spending will only continue to grow. According to a report from ExpressScripts, spending on inflammatory diseases should grow 21.6% in 2016 and 21.1% in 2017. Hepatitis C spending should climb 55.4% in 2016 and 44.3% in 2017.

For all specialty drugs, the average rate of spending growth is expected to be 22.6% in 2015, 22.3% in 2016, and 21.3% in 2017.

Expect pharmaceutical stocks to be the biggest beneficiaries of this spending. As the revenue of the largest drug companies continues to climb, the whole industry grows.

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