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Solid Q4 Earnings Drive Pharma ETF Outlook

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Total earnings for 86.8% of the total healthcare market capitalization are up 8.2% on revenue growth of 6.5%. Not only are the growth rates impressive, the earnings and revenues beat ratios of 83.8% and 86.5%, respectively, are great too. The robust numbers have pushed healthcare stocks higher by an average 1.2% against the 0.2% gain for the S&P 500 in response to earnings announcements.

Among the most notable players, Johnson & Johnson (JNJ - Free Report) was the first major drug company to report earnings on Jan 23, followed by Pfizer (PFE - Free Report) and Eli Lilly and Company (LLY - Free Report) on Jan 30 and Jan 31, respectively. Other major U.S. drug companies — Merck (MRK - Free Report) and Bristol-Myers Squibb Company (BMY - Free Report) — reported on Feb 2 and Feb 5, respectively. These industry primes posted solid results with either earnings or revenue beats or both.

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, a couple of cents ahead of the Zacks Consensus Estimate and 10.1% higher than the year-ago quarter. Revenues grew 11.5% year over year to $20.2 billion but fell shy of the Zacks Consensus Estimate of $20.22 billion. Johnson & Johnson issued its 2018 outlook with earnings per share of $8.00-$8.20 and revenues of $80.60-$81.40 billion (read: Healthcare ETFs in Focus Post JNJ Q4 Results).

Pfizer Earnings in Focus

The U.S. drug giant came up with both earnings and revenue beat. Earnings per share of 62 cents came in six cents above the Zacks Consensus Estimate and revenues of $13.7 billion were also ahead of the estimated $13.6 billion. On an annual basis, earnings per share and revenues rose 32% and 1%, respectively. For 2018, Pfizer guided revenues in the range of $53.5-$55.5 billion and earnings per share of $2.90-$3.00.

Merck Earnings in Focus

Merck beat the earnings estimate while missed on revenues. Earnings per share came in at 98 cents, surpassing the Zacks Consensus Estimate of 94 cents and improving 10% from the year-ago quarter. Revenues inched up 3% year over year to $10.43 billion and were below the Zacks Consensus Estimate of $10.45 billion. Merck issued the 2018 revenue guidance of $41.2-$42.7 billion and earnings per share guidance of $4.08-$4.23.

Bristol-Myers Earnings in Focus

Bristol-Myers topped the estimates on both fronts. It reported earnings per share of 68 cents, a penny above the Zacks Consensus Estimate and above the year-ago earnings of 63 cents. Revenues grew 4% to $5.45 billion and edged past the Zacks Consensus Estimate of $5.31 billion. The company provided 2018 earnings per share guidance of $3.15-$3.30 (see: all the Healthcare ETFs here).

Eli Lilly Earnings in Focus

Eli Lilly also surpassed the earnings and revenue estimates. Earnings of $1.14 outpaced the Zacks Consensus Estimate by seven cents and came in 20% higher than the year-ago quarter. Revenues grew 7% to $6.16 billion and beat the estimated $5.96 billion. Unlike the other drug makers, Eli Lilly raised its 2018 earnings guidance to $4.81-$4.91 from $4.60-$4.70 while maintained its revenue outlook in the range of $23-$23.5 billion.

ETF Angle

Although pharma ETFs saw terrible trading over the past one month in the latest global market rout, the string of earnings beat bolstered confidence in the space, compelling investors to cash in on the beaten down prices. Below, we have highlighted them in detail. These funds have a Zacks ETF Rank #3 (Hold), suggesting room for upside in the days ahead (read: Inverse Equity ETFs to Bet on Historic Selloff):

PowerShares Dynamic Pharmaceuticals Fund (PJP - Free Report)

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 $620.3 million and sees lower volume of around 54,000 shares a day. The fund charges 56 bps in fees and expenses. Holding 30 stocks, the fund invests more than 4% share each in BMY, PFE, JNJ and LLY. The ETF has lost 8.6% in a month.

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

This ETF provides exposure to 43 pharma stocks by tracking the Dow Jones U.S. Select Pharmaceuticals Index. The in-focus firms are the top five holdings in the basket, accounting for a combined 37.9% of total assets, suggesting heavy concentration. The product has $420.3 million in AUM and charges 44 bps in fees and expense. Volume is light as it exchanges about 26,000 shares a day. The fund has shed 8.2% in a month.

SPDR S&P Pharmaceuticals ETF (XPH - Free Report)

This fund provides exposure to the pharma companies by tracking the S&P Pharmaceuticals Select Industry Index. With AUM of $378.6 million, it trades in good volume of around 110,000 shares a day and charges 35 bps in fees a year. In total, the product holds 41 securities with the in-focus five firms taking over 4% share each. The product was down 9.1% in the same period.

VanEck Vectors Pharmaceutical ETF (PPH - Free Report)

This ETF follows the MVIS US Listed Pharmaceutical 25 Index and holds 26 stocks in its basket. The in-focus five firms account for at least 4% share each. The product has amassed $249.2 million in its asset base and trades in a moderate volume of about 76,000 shares a day. Expense ratio comes in at 0.35%. The fund has lost 7.5% in a month (read: New Pharma ETF PILL : What Investors Need to Know).

First Trust Nasdaq Pharmaceuticals ETF (FTXH - Free Report)

This fund tracks the Nasdaq US Smart Pharmaceuticals Index, holding 29 securities in its basket. Of these, Pfizer and Johnson & Johnson account for more than 7% share each while Merck, Bristol-Myers and Eli Lilly makeup for more than 3% each. FTXH has a lower level of $2.2 million in AUM and 1,000 shares in averaged daily volume. It charges 60 bps in annual fees and has shed 8.5% in the same time frame.

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