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ETFs in Focus on Momenta Buyout Deal With JNJ

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The pandemic has led to consolidation in the healthcare space. The latest is Johnson & Johnson's (JNJ - Free Report) agreement to acquire autoimmune-disease drugs maker Momenta Pharmaceuticals Inc. for $6.5 billion in an all-cash deal that is expected to close in the second half of 2020. If successful, it will be the largest pharmaceutical-industry merger so far this year.

The deal value indicates $52.50 per Momenta share, which represents a 70% premium to its closing price on Aug 18. Momenta will become part of J&J’s Janssen Pharmaceutical unit and will broaden its leadership in immune-mediated diseases. The acquisition will drive further growth through expansion into autoantibody-driven diseases. It will help Johnson & Johnson to acquire rights to Momenta’s experimental drug nipocalimab, which has potential uses in a number of autoimmune diseases.

Nipocalimab recently received a rare pediatric disease designation from the U.S. Food and Drug Administration. JNJ believes that sales for nipocalimab alone could eventually exceed $1 billion annually (read: Pharma ETFs Soar on Robust Q2 Earnings).

Autoantibody-driven diseases are often serious, and patients are underserved by the available treatment options. An estimated 2.5% of the population, or approximately 195 million people worldwide, suffer from some form of autoantibody-driven diseases, many of which are orphan and rare.

Market Impact

Following the news, shares of Momenta soared 69.2% to close the day and crushed its average volume as nearly 59.7 million shares moved hands compared with 1.2 million, on average. Meanwhile, shares of JNJ were up 0.2%.

The news has put the spotlight on a number of ETFs that could be the best ways for investors to tap the opportunity arising from the Momenta buyout deal. These funds are expected to see smooth trading in the months to come:

iShares U.S. Pharmaceuticals ETF (IHE - Free Report)

This ETF provides exposure to 43 companies that manufacture prescription or over-the-counter drugs or vaccines by tracking the Dow Jones U.S. Select Pharmaceuticals Index. Of these, Johnson and Johnson takes the top spot, accounting for 21.5% share. The product has $354.8 million in AUM and charges 42 bps in fees and expenses. Volume is lower as it exchanges about 8,000 shares a day. The fund has a Zacks ETF Rank #2 (Buy) with a High risk outlook (read: Pharma ETFs Soar on Robust Q2 Earnings).

Health Care Select Sector SPDR Fund (XLV - Free Report)

The most-popular healthcare ETF, XLV follows the Health Care Select Sector Index. This fund manages nearly $24.1 billion in its asset base and trades in heavy volume of around 7.5 million shares. Expense ratio comes in at 0.13%. In total, the fund holds 62 securities in its basket, with JNJ taking the top spot, accounting for 9.8% of the assets. Pharma accounts for 29.5% share from a sector look, while healthcare equipment and supplies, healthcare providers and services, and biotech have a double-digit exposure each. It has a Zacks ETF Rank #2 with a Medium risk outlook.

iShares Evolved U.S. Innovative Healthcare ETF

This actively managed ETF employs data science techniques to identify companies with exposure to the innovative healthcare sector. Holding 257 stocks in its basket, JNJ is the top firm with 8.8% allocation. The product has accumulated $24.5 million in its asset base and trades in a meager volume of 12,000 shares per day on average. It charges 18 bps in annual fees.

iShares U.S. Healthcare ETF (IYH - Free Report)

This fund offers exposure to 122 securities by tracking the Dow Jones U.S. Health Care Index. Here again, Johnson & Johnson dominates the fund’s returns with 9% of the total assets. In terms of industrial exposure, pharma takes the top spot at 28.3%, followed by healthcare equipment (24.5%) and biotech (18%). The product has amassed nearly $2.4 billion in its asset base and charges 43 bps in annual fees. It trades in a good volume of around 101,000 shares a day and has a Zacks ETF Rank #2 with a Medium risk outlook (read: 5 Top-Ranked Stocks Driving ETF as S&P 500 Nears New Highs).

Vanguard Health Care ETF (VHT - Free Report)

This ETF tracks the MSCI US Investable Market Health Care 25/50 Index and holds 432 stocks in its basket. Of these, Johnson & Johnson occupies the top position with an 8.1% allocation. Pharma takes the largest share at 26%, while healthcare equipment and biotech round off the top three spots. VHT is also one of the popular and liquid ETFs with AUM of $11.6 billion and average daily volume of about 210,000 shares. It charges 10 bps in annual fees and has a Zacks ETF Rank #2 with a Medium risk outlook.

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