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Pharma ETFs Soaring on Solid Q2 Earnings

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Like the past several quarters, the healthcare sector has impressed with strong Q2 earnings. This is especially true as total earnings for 71.9% of the sector’s total market capitalization are up 5.4% on revenue growth of 10.5%. Earnings and revenue beat ratios of 87.9% and 81.8%, respectively, also look encouraging. In fact, healthcare is one of the best performing sectors in terms of earnings growth trailing autos, construction, conglomerates and utilities.

Among the most notable players, Johnson & Johnson JNJ was the first major drug company to report earnings on July 19, followed by Eli Lilly and Company LLY and Bristol-Myers Squibb Company (BMY - Free Report) on July 26 and July 28, respectively. Two other major U.S. drug companies – Merck MRK and Pfizer PFE – reported on July29 and August 2, respectively. These industry primes posted solid results, raising their full-year outlook that boosted investor confidence in the space.

Johnson and Johnson Earnings in Focus

The world's biggest maker of healthcare products continued its long streak of earnings beat. Earnings per share came in at $1.74, 7 cents ahead of the Zacks Consensus Estimate and 1.8% higher than the year-ago figure. Revenues were up 3.9% year over year to $18.5 billion and edged past the Zacks Consensus Estimate of $17.9 billion (read: 3 Healthcare ETFs to Buy as JNJ Beats Q2 Earnings).

Johnson & Johnson raised its guidance for 2016. The company now expects revenues in the range of $71.5–$72.2 billion compared with the previous forecast of $71.2–$71.9 billion. Additionally, the earnings per share guidance has been raised from $6.53–$6.68 to $6.63–$6.73. The Zacks Consensus Estimate at the time of earnings release was $71.73 billion for revenues and $6.65 for earnings per share.

Pfizer Earnings in Focus

The U.S. drug giant also topped the Zacks Consensus Estimate for both the top and the bottom line, and reiterated its guidance for 2016. Earnings per share of 64 cents and revenues of $13.1 billion were ahead of our estimates by 2 cents and $0.2 billion, respectively. Notably, earnings per share grew 14% while revenues jumped 11% year over year.

For 2016, Pfizer continues to expect earnings of $2.38–$2.48 per share on revenues of $51–$53 billion. The Zacks Consensus Estimate was $52.6 billion for revenues and $2.46 for earnings per share at the time of earnings release.

Merck Earnings in Focus

Earnings per share came in at 93 cents, a penny ahead of the Zacks Consensus Estimate and 8.1% higher than the year-ago earnings. Revenues inched up 1% year over year to $9.8 billion and were in line the Zacks Consensus Estimate.

Merck now expects earnings per share in the range of $3.67–$3.77 and revenues in the band of $39.1–$40.1 billion for 2016. The Zacks Consensus Estimate at the time of release was $3.72 for earnings per share and $39.6 billion for revenues (see: all the Healthcare ETFs here).

Meanwhile, Merck is also rumored to be interested in buying biotech major Biogen BIIB.

Bristol-Myers Earnings in Focus

Bristol-Myers reported earnings per share of 69 cents, outpacing our estimate by 2 cents and increasing 30% from the year-ago quarter. Also, revenues rose 17% to $4.87 billion and edged past the Zacks Consensus Estimate of $4.63 billion.

Like other drug makers, the company also revised its earnings per share outlook upward to $2.55 to $2.65 from $2.50 to $2.60 for fiscal 2016. Our estimate of $2.63 at the time of the earnings announcement was within the guided range.

Eli Lilly Earnings in Focus

Earnings of 86 cents at Eli Lilly beat the Zacks Consensus Estimate by a penny but came in 4% lower than the year-ago earnings. Revenues grew 9% to $5.4 billion, ahead of our estimate of $5.1 billion. Eli Lilly maintained its 2016 earnings per share guidance at $3.50–$3.60 and revenue guidance at$20.6-$21.1 billion. The Zacks Consensus Estimate at the time of earnings release was $3.56 for earnings and $20.91 billion for revenues.

ETF Angle

The string of earnings beat and upbeat outlook boosted pharma stocks and ETFs despite the industry grappling with drug pricing issues (read: Pharma ETFs Outlook -- Drug Pricing Issues Remain in Focus).

Below, we have highlighted the ETFs in detail:

PowerShares Dynamic Pharmaceuticals Portfolio 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 $1.2 billion and sees good volume of around 159,000 shares a day. The fund charges 56 bps in fees and expenses from investors. Holding 23 stocks, the fund invests around 5% share each in the in-focus five firms. The ETF gained about 3.9% over the past 5 days and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook (read: ETFs to Watch If Hillary Clinton Wins the Presidency).

iShares U.S. Pharmaceuticals ETF IHE

This ETF provides exposure to 39 pharma stocks by tracking the Dow Jones U.S. Select Pharmaceuticals Index. The in-focus firms are among the top six holdings in the basket accounting for a combined exposure of almost40% of total assets, suggesting heavy concentration. The product has $657 million in AUM and charges 44 bps in fees and expense. Volume is moderate as it exchanges about 42,000 shares a day. The fund has gained4.1% over the past 5 days and has a Zacks ETF Rank of 3 with a Medium risk outlook.

SPDR S&P Pharmaceuticals ETF XPH

This fund provides exposure to pharma companies by tracking the S&P Pharmaceuticals Select Industry Index. With AUM of over $548 million, it trades in volume of around 196,000 shares a day and charges 35 bps in fees a year. In total, the product holds 39 securities with the in-focus five firms taking around4.5% share each. The product was up 5.8% in the same period and has a Zacks ETF Rank of 3 with a High risk outlook.

VanEck Vectors Pharmaceutical ETF PPH

This ETF follows the MVIS US Listed Pharmaceutical 25 Index and holds 26 stocks in its basket. Pfizer, Bristol-Myers, Johnson & Johnson and Merck make up for over 5% share each while Eli Lilly accounts for 4.8% of assets. The product has amassed $265.3 million in its asset base and trades in a moderate volume of about 83,000 shares a day. Expense ratio came in at 0.36%. The fund has surged2.5% over the past 5 days. It has a Zacks ETF Rank of 2 or ‘Buy’ rating with a Medium risk outlook (read: Follow J.P. Morgan with These Sector ETFs).

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