The pandemic has led to surge in demand for drug-testing capabilities, specifically related to COVID-19, resulting in consolidation among the companies that run clinical trials and provide other services for drugmakers.
The latest catalyst is Thermo Fisher Scientific ( TMO Quick Quote TMO - Free Report) , a world leader in serving science, which agreed to buy the healthcare testing company PPD Inc. ( PPD Quick Quote PPD - Free Report) for $17.4 billion in cash plus the assumption of $3.5 billion of debt. Deal in Focus
Per the terms of the deal, Thermo Fisher will pay $47.50 per share of PPD stock in cash. This represents about 24% premium to the closing price on Apr 13. Upon the closure of the transaction, PPD will become part of Thermo Fisher's Laboratory Products and Services Segment.
The combination will create one of the biggest drug-testing companies in the United States. The acquisition of PPD expands Thermo Fishers’ global reach in the attractive, high growth clinical research services industry. Thermo Fisher CEO Marc Casper stated that the deal is “all about speed” in getting medicines to the market (read: JNJ Vaccine Pause Gives Stay-at-Home ETFs a Shot in the Arm). The deal approved by the boards of both companies is expected to close by the end of 2021. The transaction is expected to be immediately and significantly accretive to Thermo Fisher's adjusted earnings, adding $1.40 per share in the first 12 months after close. Overall, the buyout will deliver synergies of $125 million by the third year since the date of completion, consisting of approximately $75 million of cost synergies and a near $50-million adjusted operating income benefit from revenue-related synergies. Market Impact
Following the news, shares of PPD jumped 6.5% on the day. The stock crushed its average volume as 64.9 million shares moved hands compared with 1.1 million, on average. Meanwhile, shares of TMO rose 3.4%.
This put the spotlight on some ETFs, which could be the best ways for investors to tap the opportunity arising from the proposed Thermo Fisher-PPD deal. Investors should keep a close eye on the movement of these ETFs over the coming weeks. iShares U.S. Medical Devices ETF ( IHI Quick Quote IHI - Free Report) This ETF follows the Dow Jones U.S. Select Medical Equipment Index with exposure to companies that manufacture and distribute medical devices. In total, the fund holds 66 securities in its basket and TMO occupies the second position with 12.1% share. The fund amassed $8.6 billion in its asset base while volume is light at about 164,000 shares per day, on average. It charges 42 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. Pacer US Cash Cows Growth ETF ( BUL Quick Quote BUL - Free Report) This strategy-driven ETF aims to provide capital appreciation over time by screening the S&P 900 Pure Growth Index for the top 50 companies based on free cash flow yield. It follows the Pacer US Cash Cows Growth Index, holding 51 stocks in its basket with Thermo Fisher occupying the fifth spot at 5%. The ETF accumulated $3.7 million in its asset base while charges 60 bps in annual fees. It trades in average daily volume of under 1,000 shares. Pacer BioThreat Strategy ETF ( VIRS Quick Quote VIRS - Free Report) This fund aims to invest in the U.S.-listed companies’ products or services, which help protect against, endure or recover from biological threats to human health. It tracks the LifeSci BioThreat Strategy Index, holding 48 stocks in its basket. Thermo Fisher occupies the sixth position with 4.9% of assets. The ETF is able to manage $6 million in its asset base and charges 70 bps in annual fees. It trades in a paltry average daily volume of 1,000 shares (read: What's in Store for COVID-Themed ETFs as New Cases Rise?). iShares Evolved U.S. Healthcare Staples ETF ( IEHS Quick Quote IEHS - Free Report) This actively managed ETF employs data science techniques to identify companies with exposure to the health-care staples sector. It holds 159 stocks in its basket with TMO taking the fourth spot at 4.4%. The fund amassed $27.8 million in its asset base and sees a meager volume of 7,000 shares. It charges 18 bps in annual fees. Health Care Select Sector SPDR Fund ( XLV Quick Quote XLV - Free Report) The most-popular health care ETF XLV follows the Health Care Select Sector Index. This fund manages $25.3 billion in its asset base and trades in a heavy volume of 8.6 million shares. The expense ratio comes in at 0.12%. In total, the fund holds 63 securities in its basket with Thermo Fisher taking the sixth spot at 4.2% of the assets. Health care equipment and supplies, and pharma take the largest share at 28.5% and 27.7% share, respectively, from a sector look while health care providers and services plus biotech have double-digit exposure each. It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: 4 Sector ETFs to Watch for Gains in Q2). Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week.
Get it free >>