The pharmaceutical industry has been performing remarkably well this year after emerging relatively unscathed from one of the biggest patent cliffs in recent times. Thanks goes largely to robust earnings growth, new drug approvals and increasing merger & acquisition activities. While the industry is not completely free from genericization, major patent expiries are over and done with.
In fact, pharma has been leading the healthcare world over the past one month. This corner of the healthcare space has posted solid earnings, resulting in soaring stock prices.
Total earnings for the medical sector that have reported third quarter results so far are up 0.2% with a beat ratio of 74.5%, while revenues are up 5.8% with a beat ratio of 51%. The numbers look impressive when compared to the second quarter earnings decline of 1.6% with a beat ratio of 71.4% and revenue growth of 2.4% with a beat ratio of 51%.
Robust performance from some of the companies in the sector from large-to-small caps, such as, Pfizer (NYSE:PFE), Bristol-Myers Squibb (BMY), Merck & Co. (NYSE:MRK), Johnson & Johnson (JNJ), Amgen (NASDAQ:AMGN), Santarus (SNTS) and Endo Health Solutions (ENDP) has spread an air of optimism.
f Favorable earnings results have duly been reflected in the Street’s response, with a number of analysts raising their estimates on the companies in the sector (read: 4 Ways to Play the Bullish Trend in Healthcare with ETFs).
Aat the time of writing. All the four Zacks industries that are classified under pharma have Zacks Ranks in the top 30%, suggesting good trading for this segment in the coming months.
Other encouraging trends that drive this sector include an ageing population, people surviving longer with chronic diseases and technology revolutions.
How to Play?
Investors looking to gain exposure to this trend may want to take a look at the following ETFs, as these offer concentrated exposure to pharmaceutical firms. These products are not only likely winners post Q3, but for months to come as well.
SPDR S&P Pharmaceuticals ETF (NYSEARCA:XPH)
The fund tracks the S&P Pharmaceuticals Select Industry Index, holding 32 securities in its basket. The product has $659.6 million in AUM and trades more than 90,000 shares in volume a day, while its cost is just 35 basis points a year.
The product is well spread across each security as the top 10 holdings account for less than 42% of the total assets. ENDP, SNTS and Salix Pharmaceuticals (SLXP) occupy the top three positions in the basket with a combined 13.93% share. While large caps account for 43% of total assets, small and mid caps take the remainder.
The product generated returns of nearly 9% in the trailing one-month period and 55% in the year-to-date timeframe. The fund has a Zacks ETF Rank of 2 or ‘Buy’ rating with ‘Low’ risk outlook.