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Biotech ETFs Slumping on Q3 Results

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The biotech sector has faced rough trading since the beginning of 2016, continuing the volatile trend from the second half of 2015. Media and political focus on the high prices of drugs and increasing competition have made things difficult for the sector. Democratic presidential candidate, Hillary Clinton has been vocal about the steep pricing of drugs and has pledged to find ways to institute reforms to curb rising drug prices (read: ETFs to Play as Biotech Juggles Election & Earnings).

Although the scenario improved with encouraging second-quarter results, the third quarter earnings season failed to continue the momentum. The sector has failed to gain investor confidence so far in the third quarter. Although well-known biotech industry players like Amgen Inc. (AMGN - Free Report) , Biogen (BIIB - Free Report) and Celgene Corporation (CELG - Free Report) managed to beat estimates on both earnings and revenues, several other companies including Gilead (GILD - Free Report) and Alexion Pharmaceuticals (ALXN - Free Report) reported mixed results.

Quite expectedly, investors will keep an eye on the biotech sector to assess whether it can pull off another turnaround supported by strong pipelines, innovative treatments, growing demand for drugs, especially for rare-to-treat diseases, an aging population and increased health care spending (read: Biotech ETF Industry Outlook).
Biotech Earnings in Detail
Biotech behemoth, Amgen, beat both earnings and revenue estimates in the third quarter. The company’s third-quarter 2016 earnings of $3.02 per share surpassed the Zacks Consensus Estimate of $2.79 and improved 11% from the year-ago earnings. Also, total revenue grew 2% to $5.81 billion, which beat the Zacks Consensus Estimate of $5.74 billion. The company also upgraded its outlook for 2016 earnings to $11.40–$11.55 per share from $11.10–$11.40 per share. The company also pushed up the lower end of its revenue guidance to $22.6–$22.8 billion from $22.5–$22.8 billion. However, the stock fell post results owing to soft performance of Enbrel, a key product at Amgen.

Meanwhile, Biogen also beat on earnings and revenues. The company’s earnings per share of $5.19 were well above the Zacks Consensus Estimate of $4.99. Earnings grew about 16% year over year while revenues increased 6%. Revenues came in at $2.96 billion, ahead of the Zacks Consensus Estimate of $2.90 billion.

Similarly, Celgene reported encouraging results with earnings of $1.39 per share (including stock-based compensation expenses) beating the Zacks Consensus Estimate of $1.31 and revenues of $2.98 billion topping the Zacks Consensus Estimate of $2.85 billion. Both earnings and revenues rose year on year in the reported quarter by 28% each. Net sales of the drug Revlimid, the backbone of Celgene, saw a year-over-year rise of 28%. The company has upped its 2016 outlook. The company now anticipates earnings in the range of $5.88–$5.92 per share compared with the old guidance of $5.70–$5.75 per share.

On the other hand, Alexion came up with a mixed third-quarter results with lower-than-expected earnings and revenues beating estimates. Third-quarter 2016 earnings (including stock-based compensation expense) of $1.03 per share missed the Zacks Consensus Estimate of $1.04. Nevertheless, Alexion’s revenues climbed 20.1% year over year in the third quarter to $799 million, surpassing the Zacks Consensus Estimate of $784 million. For 2016, the company expects adjusted earnings per share and revenues to be at the higher end of the previously guided range of $4.50–$4.65 and $3.05–$3.1 billion, respectively.

Gilead also reported mixed third-quarter results as the company beat on revenues but lagged the Zacks Consensus Estimate for earnings. The biotech giant’s third-quarter earnings (including stock-based compensation expenses) of $2.70 per share missed the Zacks Consensus Estimate by 4 cents. Reported earnings were 15.4% lower than the year-ago period.

Quarterly revenues were down 9.6% to $7.5 billion as lower hepatitis C virus (HCV) sales pulled back results. Revenues edged past the Zacks Consensus Estimate of $7.4 billion. Meanwhile, the company reiterated its 2016 product sales guidance. The company expects product sales in the range of $29.5–$30.5 billion.

ETFs in Focus

Due to unimpressive results, biotech ETFs with considerable exposure to the five aforementioned stocks ended in the red in the last 10 trading sessions (as of November 4, 2016). Below we discuss four of these ETFs having a sizeable exposure to the above stocks (see all Healthcare ETFs here).

iShares Nasdaq Biotechnology ETF (IBB - Free Report)

This top player in the biotech ETF space tracks the NASDAQ Biotechnology Index, holding 181 securities in the basket. Amgen, Celgene, Gilead Sciences, Biogen and Alexion are placed among the top 6 holdings with a combined exposure of about 38% in the fund. The fund has an asset base of more than $6.7 billion and trades in an average volume of nearly 1.6 million shares a day. It has an expense ratio of 0.47% and lost 5.9% in the above mentioned timeframe. IBB currently has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Prepare for a Clinton Presidency with These Stocks & ETFs)

VanEck Vectors Biotech ETF (BBH - Free Report)

This fund follows the MVIS U.S. Listed Biotech 25 Index and holds 26 securities in its basket. Gilead Sciences (11.9%), Amgen (11.5%), Celgene (10.6%), Biogen (6.7%) and Alexion (5.3%) take the top six spots in the fund. It has amassed nearly $508.5 million in its asset base and trades in moderate volumes of roughly 80,000 shares a day. The product charges an annual fee of 35 bps per year and lost almost 5.1% in the said timeframe. It currently carries a Zacks ETF Rank #3 with a High risk outlook.

PowerShares Dynamic Biotechnology & Genome Portfolio (PBE - Free Report)

The fund tracks the Dynamic Biotech & Genome Intellidex Index. The top 10 holdings include Alexion (5.7%), Biogen (5.2%), Gilead (5.2%) and Amgen (4.6%). Total assets of the fund amount to $217.8 million, representing 30 holdings. The fund’s expense ratio is 0.58%. The trading volume is roughly 32,000 shares per day. The fund has lost 5.6% in the past 10 trading sessions. It currently carries a Zacks ETF Rank #3 with a High risk outlook.

First Trust NYSE Arca Biotech ETF (FBT - Free Report)

FBT tracks the NYSE Arca Biotechnology Index and holds 30 securities in the basket. The fund is well diversified with no stock holding more than 4% weight. Biogen, Amgen, Celgene, Alexion and Gilead have a combined exposure of about 16% in the fund. Total assets of the fund are $720.2 million. The fund’s expense ratio is 0.55%. The trading volume is roughly 77,000 shares per day. It currently carries a Zacks ETF Rank #3 with a High risk outlook. The fund has lost 5.7% in the last 10 trading sessions (read: Inside the Recent Surge in Biotech ETFs).

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