Pharma ETFs in Focus on Valeant-Salix Deal – ETF News And Commentary

After a blockbuster 2014, the health care space continues its mergers and acquisitions this year as well. The latest catalyst in the space is the Canadian drug maker Valeant Pharmaceuticals International (VRX), which is set to acquire leading U.S. gastrointestinal drug maker Salix Pharmaceuticals (SLXP) for $14.5 billion, including $4.4 billion debt (read: Pfizer Set to Acquire Hospira: Healthcare ETFs in Focus).

The transaction represents the largest deal for Valeant in its history, according to data compiled by Bloomberg and follows Valeant’s failed hostile bid for Botox-maker Allergan (AGN) last year.    

Valeant-Salix Deal in Detail

Under the terms of the deal, Quebec-based Valeant will pay $158 per share in cash to acquire all of the stocks of Salix that will be financed through a combination of bank debt and bonds. The transaction, approved by the board of directors of both companies, is expected to close in the second quarter.

The acquisition will expand Valeant’s presence in a growing, multibillion-dollar market for drugs treating gastrointestinal diseases or stomach disorders like traveler’s diarrhea. The company estimates that the U.S. market for stomach-disorder treatments currently stands at $5 billion and is growing 5% a year. Also, Salix is leading the market in terms of volume growth and has a promising near-term pipeline of innovative products.

The announced deal is minimally accretive to Valeant’s earnings this year but will add 20 cents per share in 2016. In addition, the combined company will yield more than $500 million in annual cost savings within six months. However, the deal comes with a price, as it will likely double Valeant’s debt to $31 billion (read: Can Pharma ETFs Continue their Uptrend in 2015?).

Market Impact

The shares of VRX surged as much as 15.9% on the day to an all-time high of $200.76, representing the biggest one-day gain since January 2011. The stock also crushed its average volume figures, as more than 19.6 million shares moved hands compared to just 2.2 million on average. Meanwhile, Salix lost 1.3% as investors looked to exit their positions and sees robust volume of more than 32.6 million shares versus the average daily volume of 2.3 million.

ETFs in Focus

The M&A deal has put the pharma corner of the broad health care ETFs in focus over the coming days. Below, we have highlighted the funds having decent allocation to these in-focus firms (see: all the Healthcare ETFs here).

Investors should note that these products have a decent Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook, suggesting that these might perform on par with the broad market over the next one-year period. These funds might benefit from this takeover deal in the short term given than the medical drug industry currently has a solid Zacks Rank in the top 31% and Valeant and Salix both has a top Zacks Rank #2 (Buy) and #1 (Strong Buy), respectively.

PowerShares Dynamic Pharmaceuticals Fund (PJP)

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 $1.8 billion and sees good volume of about 181,000 shares a day. The fund charges 58 bps in fees and expenses. Holding 26 stocks in its basket, Salix Pharma occupies the seventh position with 4.47% share. The ETF hit a new high of $76.18 in yesterday’s trading session, having gained 13.8% in the year-to-date timeframe.

SPDR S&P Pharmaceuticals ETF (XPH)

This fund follows the S&P Pharmaceuticals Select Industry Index and has AUM of over $1 billion. It trades in moderate volume of around 81,000 shares a day and charges 35 bps in fees a year. Holding 38 securities, Salix Pharma takes the top spot at 4.15% share. The fund is diversified across market cap levels with 48% in small caps, 39% in large cap and the rest in mid caps. The product has added 14.2% so far this year and touched a new high of $123.86 yesterday (read: Big Pharma Weak Guidance Put These ETFs in Focus).

Market Vectors Pharmaceutical ETF (PPH)

This product tracks the Market Vectors US Listed Pharmaceutical 25 Index and holds 26 stocks with VRX and SLXP making up for combined 5.69% share in the basket. This large cap centric fund has amassed $377.6 million in its asset base and charges 35 bps in fees per year. Volume is decent as it exchanges around 89,000 shares in hand per day. PPH also hit a fresh high of $69.87 yesterday and is up 7.7% so far this year.

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VALEANT PHARMA (VRX): Free Stock Analysis Report
 
SALIX PHARM-LTD (SLXP): Free Stock Analysis Report
 
PWRSH-DYN PHARM (PJP): ETF Research Reports
 
MKT VEC-PHARMA (PPH): ETF Research Reports
 
SPDR-SP PHARMA (XPH): ETF Research Reports
 
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Pharma ETFs in Focus on Valeant-Salix Deal – ETF News And Commentary
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