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Amid The Pfizer-Hospira Deal, Are Healthcare ETFs In Play?


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After several failed bids to acquire leading British drug maker AstraZeneca (NYSE: AZN), Pfizer (NYSE: PFE) will now buy Hospira (NYSE: HSP), a leading provider of injectable drugs and infusion technologies as well as a global leader in biosimilars. The transaction is estimated at about $17 billion, including $1.75 billion in debt.

Under the terms of the deal, the largest U.S. drug maker will pay $90 per share, a premium of 39% to Wednesday's closing price of $64.80. The transaction, approved by the board of directors of both companies, is expected to close in the second half of the year. The deal underlines the industry's hankering for developing biosimilars, which typically cost 20-30% less, as big-ticket patents on biotech drugs expire and cash-strapped drug makers look to cut costs (read: Top Ranked Healthcare ETFs in Focus).

The acquisition will expand Pfizer's presence in the two large and growing categories - sterile injectables and biosimilars. In fact, the deal could make Pfizer a market leader in biosimilars, which are cheaper versions of expensive biotechnology drugs made from living cells. This is because the company projects that the injectables market will double to $70 billion by 2020 and biosimilars market to reach $20 billion, up from just a few dollars at present.

The announced deal is accretive to Pfizer's earnings by 10–12 cents per share in the first full-year of completion. In addition, the combined company will save $800 million in cost by 2018.

According to most analysts, the acquisition paves way for a break-up of Pfizer into two in future years to enhance shareholder value. The company could split its Global Established Pharmaceutical business in 2017.

Market Impact

The stock market greeted Pfizer move with enthusiasm, pushing both stocks higher. Pfizer shares gained as much as 3.5% on the day while Hospira shares climbed as much as 35.4% on elevated volumes. Given this, health care ETFs having the largest allocation to Pfizer will hog limelight in the coming days.  

iShares U.S. Pharmaceuticals ETF (IHE)

This ETF provides exposure to the pharma corner of the broad health care space by tracking the Dow Jones U.S. Select Pharmaceuticals Index. Holding 39 securities in its basket, Pfizer occupies the second position with 7.68% share. The fund has a slight tilt toward the large cap stocks at 59%, followed by 28% in small caps and the rest in mid caps. The product has amassed $894.4 million in its asset base while volume is relatively light at about 44,000 shares a day on average. The fund charges 43 bps in fees per year from its investors (read: Big Pharma Weak Guidance Put These ETFs in Focus).

Health Care Select Sector SPDR Fund (XLV)

The most popular health care ETF, XLV follows the S&P Health Care Select Sector Index. This fund manages about $12.7 billion in its asset base and trades in heavy volume of more than 9 million shares. Expense ratio came in at 0.15%. In total, the fund holds 58 securities in its basket with Pfizer taking the second spot at 7.60% of the assets. Pharma accounts for 43.4% share from an industry exposure look while biotech, health care providers and services, and equipment and suppliers make up for double-digit exposure.

iShares U.S. Healthcare ETF (IYH)

This fund provides exposure to 111 securities by tracking the Dow Jones U.S. Health Care Index. Here again, Pfizer occupies the second position at 7.14%. In terms of industrial exposure, pharma takes the top spot at 41.6%, followed by biotech (22.5%), medical equipment (16.5%) and health care services (15.1%). The product has amassed nearly $2.0 billion in its asset base while charges 43 bps in annual fees. It trades in good volume of about 377,000 shares a day, suggesting a relatively tight bid/ask spread (see: all the Healthcare ETFs here).

Market Vectors Pharmaceutical ETF (PPH)

This product is less popular in the pharma corner of the broad health care space with AUM of $345.7 million. It tracks the Market Vectors US Listed Pharmaceutical 25 Index and charges 35 bps in fees and expenses. Volume is decent as it exchanges around 94,000 shares in hand per day. This large cap centric fund holds 26 stocks, with Pfizer holding 6.56% nad taking the third spot in the basket.

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PFIZER INC (NYSE: PFE): Free Stock Analysis Report
HOSPIRA INC (NYSE: HSP): Free Stock Analysis Report
SPDR-HLTH CR (ETF:XLV): ETF Research Reports
MKT VEC-PHARMA (ETF:PPH): ETF Research Reports
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