Though the healthcare sector lost its allure after the wild ride of
biotech stocks last month, it is regaining some shine with the
pharmaceutical corner of the broader space taking center stage this
week (read: Any Survivors from the Biotech ETF Meltdown?).
This is especially true with the ongoing flurry of mergers and
acquisitions (M&A) talks in this industry, sending many drug
stocks higher. Big pharma companies are looking to reduce their
costs through various M&A activities.
Big Pharma Hot Deals in Focus
The Swiss pharmaceutical giant Novartis (NVS) and British drug
maker GlaxoSmithKline (GSK) have entered into a multibillion dollar
swap deal in which the former would buy the cancer drug business
(oncology unit) of the latter for as much as $16 billion and sell
its vaccine division, excluding its influenza vaccines, to Glaxo
for $7.1 billion in exchange.
Upon completion of the deal, Novartis would be able to generate
one-fifth (roughly $10.9 billion) of its annual revenues from the
combined cancer drug business which would include Novartis’s
Excedrin pain reliever and Maalox antacid, and GlaxoSmithKline’s
Aquafresh toothpaste and Nicorette chewing gum.
Meanwhile, Novartis will also sell its animal health division to
the U.S. pharmaceutical company Eli Lilly (LLY) for $5.4 billion.
Shares of Glaxo rose over 4% in yesterday’s trading while Novartis
added 1.3%. LLY shares are up 1.4% (read: A Comprehensive Guide to
Pharma ETFs).
Further, the M&A frenzy continued with an offer made by
activist investor William Ackman and Valeant Pharmaceuticals (VRX)
to acquire Botox-maker Allergan (AGN) for $45.6 billion. Under the
terms of the deal, Allergan shareholders will receive $48.30 in
cash and 0.83 VRX shares for each share of AGN.
The proposed acquisition, if successful, would be the most powerful
in the global eye-care, dermatology and cosmetic drug businesses.
AGN shares soared over 15% in yesterday’s trading while VRX climbed
about 7.5%.
Moreover, the rumors that the second-largest British drug maker
AstraZeneca (AZN) could be a possible takeover target of the U.S.
largest drug maker Pfizer (PFE) demonstrates the fact the pharma
industry is moving into another period of consolidation. The shares
of AZN surged 9% on Monday trading, representing the biggest
one-day gain in more than three years following its potential
takeover target report in the weekend. Pfizer was up nearly 2.5% in
the first two sessions of this week.
ETFs in Focus
The solid trading has been seen in the ETF world as well with
pharma ETFs clocking solid gains over the past two days. Funds like
SPDR S&P Pharmaceuticals ETF (XPH),
iShares U.S. Pharmaceuticals ETF (IHE) and
Market Vectors Pharmaceutical ETF (PPH) were up
5.7%, 4.7% and 4%, respectively, over the last two trading
sessions. Below, we have highlighted the funds in detail (see: all
the Healthcare ETFs here):
XPH - This fund follows the S&P
Pharmaceuticals Select Industry Index and has AUM of $822 million.
It trades in good volume of more than 132,000 shares a day and
charges just 35 bps in fees a year. Holding 35 securities, the
product is well spread across each component as each security holds
less than 4.4% of total assets. Allergan, Eli Lilly and Pfizer are
among the fund’s top 10 holdings.
The fund is also widely diversified across various market cap
levels with 45% in large cap, 37% in small caps and the rest in mid
caps. The product has gained about 8.50% so far in the year and has
a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with Medium risk
outlook.
IHE - This ETF tracks the Dow Jones U.S. Select
Pharmaceuticals Index and holds 38 securities in its basket. The
product is highly concentrated on the top three firms - Johnson
& Johnson (JNJ), Pfizer and Merck (MRK) – and collectively make
up for 33.54% of total assets. LLY and AGN also occupy the fifth
and sixth positions in the basket with nearly 6% share each (read:
Solid JNJ Earnings Put Healthcare ETFs in Focus).
IHE is a large cap-centric fund accounting for 74% of the assets.
The product has amassed $647 million in its asset base while volume
is relatively light at about 34,000 shares a day on average. The
fund charges 45 bps in fees per year from its investors. The ETF
has gained nearly over 9% year-to-date and has a Zacks ETF Rank of
2 or ‘Buy’ rating with Medium risk outlook.
PPH – This product is less popular and less liquid
in the pharma corner of the broad healthcare space with AUM of
$315.6 million and average daily volume of less than 59,000 shares.
It tracks the Market Vectors US Listed Pharmaceutical 25 Index and
charges 35 bps in fees and expenses. In total, the fund holds 26
stocks in its basket that is guilty of concentration on the top 10
holdings at 60.55%.
Some of the in-focus firms – Novartis, Pfizer, GlaxoSmith and Eli
Lilly - occupy the top 10 holdings at 9.02%, 7.325%, 4.94% and
4.49%, respectively. Here again, the ETF is tilted toward large cap
at 98%. Though PPH currently has a Zacks ETF Rank of 4 or ‘Sell’
rating with Medium risk outlook, it has added more than 12% in the
year-to-date time frame.
Bottom Line
Investors should note that these products are clearly outpacing the
broad market fund (SPY) and the broad sector fund (XLV) by wide
margins (read: 3 Pharma ETFs Beating the Market).
This trend is likely to continue in the coming months as pharma has
one of the best ranks for any industry as per the Zacks Industry
Rank at the time of writing. All the four Zacks industries that are
classified under pharma have Zacks Ranks in the top 36%. Further,
huge M&A activities with more to come would continue to boost
this corner of the investing world. As such, investors should
definitely consider the above-mentioned ETFs in their
portfolio.
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ISHARS-US PHARM (IHE): ETF Research Reports
MKT VEC-PHARMA (PPH): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
SPDR-HLTH CR (XLV): ETF Research Reports
SPDR-SP PHARMA (XPH): ETF Research Reports
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