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Drug ETFs Surge on M&A Activity (AGN, VRX, IHE, XPH, PPH, AZN)

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April 22, 2014 1:24 pm
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Over the past couple of days there has been news of several multi-billion dollar deals in the pharmaceutical sector. The big news came on Monday night when it began to leak that Valeant Pharmaceuticals (NYSE: VRX) was going to make a bid for Allergan (NYSE: AGN), the maker of Botox. The deal could be worth as much as $47 billion in cash and stock. The share price of both stocks soared on the news.

 

This weekend there was a rumor that Pfizer (NYSE: PFE) could make a bid for AstraZeneca (NYSE: AZN) that would make it one of the largest deals in the sector, upwards of $100 billion. And then there was Novartis (NYSE: NVS) buying the oncology unit at GlaxoSmithKline (NYSE: GSK) for over $15 billion.

 

The flurry of M&A activity has helped the sector rebound from a nasty sell-off that was led by the biotech stocks over the last month. The moves over the last few days show the strength of the sector and the cash that is available for even more mergers in the future.

 

Pharma ETFs

 

When there is M&A activity in a sector it typically creates excitement and it attracts new money. This trend will help all pharma-related ETFs. The iShares U.S. Pharmaceutical ETF (NYSE: IHE) has exposure to PFE and AGN, with both stocks in the top six holdings. In the last 12 months the ETF is up 26.5 percent and it charges an expense ratio of 0.45 percent.

 

The SPDR S&P Pharmaceuticals ETF (NYSE: XPH) also has AGN and PFE in its top holdings at number two and number nine, respectively. The ETF is up 42 percent in the last year and it charges an expense ratio of 0.35 percent.

 

The Market Vectors Pharmaceutical ETF (NYSE: PPH) is different than the first two listed because it invests in companies outside of the U.S. Therefore, the ETF can hold more of the stocks mentioned in the merger activity. Similar to the first two ETFs, AGN and PFE are in the top six holdings, but it also owns NVS, AZN, GSK, and VRX. All six stocks mentioned above are found in the ETF’s portfolio. The expense ratio is 0.35 percent and over the last 12 months it was up 25.4 percent.

 

Expect the ETFs to be on the move this week and possibly retest the highs set earlier this year.

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