Big Pharma Solid Q3 Earnings Put These ETFs in Focus - ETF News And Commentary

The healthcare space has emerged relatively unscathed from the biotech meltdown seen early in the year and is clearly outperforming the broad market. This is primarily thanks to strong performances by both biotech and pharma companies and encouraging industry trends. Further, solid corporate earnings are propelling the stocks even higher lately.

Though biotech is leading the health care world from the year-to-date look, Q3 earnings from some of the pharma companies have been inspiring in particular. Though patent expirations and stiff competition took a toll on most of these companies' revenues and profitability and might continue doing so in the coming months, these have either managed to meet or successfully beat our earnings estimates.

The major outperformer is the world's largest maker of healthcare products – Johnson & Johnson (JNJ) – which kept its long streak of earnings beat and raised full-year earnings outlook for the third time in a row on growing sales of its new hepatitis C drug. The stock surged about 9% since its earnings announcement on October 14 (read:

).

Other industry primes like Pfizer (

), Merck (

), Eli Lilly and Company (

) and Bristol-Myers Squibb Company (

) built up investors' confidence in this corner of the health care space.

Earnings per share came in at 57 cents, a penny ahead of the Zacks Consensus Estimate but 2% below the year-ago earnings. Revenues slipped 2% year over year to $12.36 billion, but topped the Zacks Consensus Estimate of $12.16 billion thanks to growing sales of its cancer medicines and rising demand in emerging markets.  

Despite the earnings beat, the U.S. drug giant narrowed its earnings per share guidance range from $2.20-$2.30 to $2.23-$2.27 and brought down the high end of the revenue guidance from $48.7–$50.7 billion to $48.7–$49.7 billion for the full fiscal year owing to stiff competition. The Zacks Consensus Estimate for earnings and revenues are currently $2.25 per share and $49.51 billion, respectively.

Shares of PFE added 1.6% over the last two days following the earnings announcement on October 28.

The second largest U.S. drug maker reported earnings per share of 90 cents outpacing our estimate by couple of cents but deteriorating 2.2% from the year-ago earnings. Meanwhile, revenues dropped 4.3% to $10.56 billion and fell short of the Zacks Consensus Estimate of $10.69 billion.

Like Pfizer, Merck also reduced its revenue and earnings per share guidance for 2014. It now projects revenues of $42.4-$42.8 billion and earnings per share of $3.46–$3.50 compared with the previous outlook of $42.4-$43.2 billion and $3.43-$3.53, respectively. The Zacks Consensus Estimate for revenue and earnings are currently $42.48 billion and $3.49 per share, respectively (read:

).

The stock lost about 2.5% to date after its earnings announcement on October 27.

Earnings of 66 cents at Eli Lilly met the Zacks Consensus Estimate but declined 41% from the year-ago earnings. Revenues also fell 16% to $4.88 billion but were slightly above our estimate of $4.83 billion. The company reiterated its full-year earnings per share guidance of $2.72–$2.80 on revenues of $19.4–$20.0 billion. The Zacks Consensus Estimate for earnings and revenue are currently of $2.78 and $19.69 billion, respectively.

Shares of LLY are up 1.2% post earnings announcement on October 23.

Though Bristol-Myers topped the Zacks Consensus Estimate both on top and bottom lines, the numbers are weaker than the year-ago levels. Earnings per share of 45 cents and revenues of $3.88 were ahead of our earnings estimate respectively by four cents and $0.13 billion. Notably, earnings per share fell 2% and revenue slid 4% year over year.

The company maintained its 2014 revenue guidance of $15.2–$15.8 billion and earnings per share guidance of $1.70-$1.80. The Zacks Consensus Estimate for revenue and earnings are currently of $15.57 billion and $1.78, respectively.

Shares of BMY are up 1% post its earnings announcement on October 24.

While these firms have given mixed performances depending on their specific fundamentals, pharma ETFs have been surging over the past one week. It is worth noting that BMY currently holds a Zacks Rank #2 (Buy) while the other four bellwethers mentioned have a Zacks Rank #3 (Hold). This suggests some profitable trading for these stocks in the coming days.

Given this, we have highlighted three pharma ETFs having the largest allocation to these drug makers. Investors should closely monitor the movement in these funds and could catch the opportunity from any surge in the stock prices (see:

).

This is by far the most popular choice in the pharma space that follows the Dynamic Pharmaceuticals Intellidex Index. The product has AUM of about $1.4 billion and sees good volume of about 140,000 shares a day. The fund charges 58 bps in fees and expenses from investors.

Holding 27 stocks, the fund invests nearly 19% of total assets in the in-focus four firms, which are among the top 10 holdings while LLY accounts for 3% share. The ETF gained 5.2% in the past five days and touched a new 52-week high of $67.19 on October 29. It has a Zacks ETF Rank of 4 or ‘Sell' rating with a Medium risk outlook.

This ETF provides exposure to 42 pharma stocks by tracking the Dow Jones U.S. Select Pharmaceuticals Index. The in-focus five firms are among the top six holdings accounting for 36.2% of total assets, suggesting heavy concentration (read:

).

The product has $791.9 million in AUM and charges 43 bps in fees and expense. Volume is light as it exchanges about 31,000 shares a day. The fund has added about 3% over the past five trading sessions and hit the new 52-week high of $144.22 on October 28. IHE has a Zacks ETF Rank of 4 with a Medium risk outlook.

This ETF follows the Market Vectors US Listed Pharmaceutical 25 Index and holds 26 stocks in its basket. JNJ, PFE, MRK and BMY are among the top five holdings and make up for a combined 29.16% share while LLY takes the twelfth spot at 4.47%.

The product has amassed $375.4 million in its asset base and trades in a moderate volume of more than 102,000 shares a day. Expense ratio came in at 0.35%. The fund is up 1.9% over the past week and has a Zacks ETF Rank of 3 or ‘Hold' rating with a Medium risk outlook.

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