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String of Q4 Earnings Beat Fails to Revive Pharma ETFs

Like in the past few quarters, the healthcare sector impressed with its earnings in Q4. This is especially true as total earnings for 77.1% of the sector's total market capitalization are up 6.8% on revenue growth of 9.2%, with earnings and revenue beat ratios of 81.3% and 71.9%, respectively. In fact, the sector is leading the way higher in terms of beating revenue estimates.

Among the most notable players, Johnson & Johnson ( JNJ) was the first major drug company to report earnings on January 26, followed by Eli Lilly and Company ( LLY ) and Bristol-Myers Squibb Company ( BMY ) on January 28. Two other major U.S. drug companies - Pfizer ( PFE ), Merck ( MRK ) - reported on February 2 and February 3, respectively. Each of these industry primes outpaced our earnings estimates and provided their full-year outlook while some missed on the revenue front.

Johnson and Johnson Earnings in Focus

The world's biggest maker of healthcare products continued its long streak of earnings beat despite currency headwinds, which were responsible for the miss on revenues. Earnings per share came in at $1.44, a nickel ahead of the Zacks Consensus Estimate and 5.1% higher than the year-ago earnings. Revenues slid 2.4% year over year to $17.81 billion and fell shy of the Zacks Consensus Estimate of $17.94 billion (read: J&J Earnings Beat Fails to Cheer Healthcare ETFs ).

Johnson & Johnson issued guidance for fiscal 2016. The company expects revenues in the range of $70.8-$71.5 billion and earnings per share of $6.43-$6.58. The Zacks Consensus Estimate for revenues and earnings per share at the time of earnings release was $71.2 billion and $6.35, respectively. JNJ has gained 7.8% to date since its earnings announcement.

Pfizer Earnings in Focus

The U.S. drug giant topped the Zacks Consensus Estimate for both the top and the bottom lines, and provided guidance for fiscal 2016. Earnings per share of 53 cents and revenues of $14.05 billion were ahead of our estimates by a penny and $0.44 billion, respectively. Notably, earnings per share slid 2% while revenues grew 7% year over year.

For fiscal 2016, Pfizer expects earnings per share of $2.20-$2.30 and revenues of $49-$51 billion. The upper ends of both the guided figures were well below the Zacks Consensus Estimate of $2.38 for earnings per share and $52.5 billion for revenues at the time of earnings release. Based on weak guidance, shares of PFE are down 3.9% since the earnings announcement.

Merck Earnings in Focus

Earnings per share came in at 93 cents, a couple of cents ahead of the Zacks Consensus Estimate and 6.9% higher than the year-ago earnings. Revenues slipped 2.5% year over year to $10.21 billion, and were slightly below the Zacks Consensus Estimate of $10.45 billion.

Merck projects earnings per share in the range of $3.60-$3.75 and revenues in the band of $38.7-$40.2 billion for 2016. The Zacks Consensus Estimate at the time of the release was pegged at $3.74 for earnings per share and $40.4 billion for revenues. The stock has lost about 3.6% to date post its earnings announcement (see: all the Healthcare ETFs here ).

Bristol-Myers Earnings in Focus

Bristol-Myers reported earnings per share of 38 cents, outpacing our estimate by 10 cents but declining 17% from the year-ago quarter. Meanwhile, revenues inched up 1% to $4.29 billion and edged past the Zacks Consensus Estimate of $4.10 billion.

Like the other drug makers, the company also provided its outlook for fiscal 2016. It expects earnings per share of $2.30-$2.40; the midpoint of which was higher than our estimate of $2.31 at the time of the earnings announcement. Revenues are expected to grow in the mid single digits. Shares of BMY are down 2.4% to date since the earnings announcement.

Eli Lilly Earnings in Focus

Earnings of 78 cents at Eli Lilly beat the Zacks Consensus Estimate by a penny and came in 5% lower than the year-ago earnings. Revenues remained flat at $5.38 billion and were above our estimate of $5.28 billion.

Eli Lilly maintained its 2016 earnings per share guidance of $3.45-$3.55 on revenues of $20.2-$20.7 billion. The Zacks Consensus Estimate at the time of the earnings release was pegged at the upper end of both the guided figures. Shares of LLY tumbled 9.1% since the earnings release.

ETF Angle

Despite the string of earnings beat, pharma stocks are suffering from the broad healthcare sector concerns, including increased regulatory scrutiny over high drug prices, political uncertainty surrounding healthcare reform, and soft enrollment in public health insurance exchanges (read: Biotech ETFs Hit 52-Week Lows: Time to Buy? )

Rough trading has spread into the pharma ETFs as well. Below, we have highlighted these in detail:

PowerShares Dynamic Pharmaceuticals 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 $1.3 billion and sees good volume of around 257,000 shares a day. The fund charges 56 bps in fees and expenses from investors. Holding 23 stocks, the fund invests more than one-fourth of its assets in the in-focus five firms. The ETF shed about 3.3% over the past 10 days and has a Zacks ETF Rank of 2 or 'Buy' rating with a High risk outlook.

iShares U.S. Pharmaceuticals ETF ( IHE )

This ETF provides exposure to 44 pharma stocks by tracking the Dow Jones U.S. Select Pharmaceuticals Index. The in-focus five firms are among the top six holdings accounting for 40% of total assets, suggesting heavy concentration. The product has $720.7 million in AUM and charges 44 bps in fees and expense. Volume is light as it exchanges about 67,000 shares a day. The fund has lost 3% over the past 10 days and has a Zacks ETF Rank of 2 with a Medium risk outlook.

SPDR S&P Pharmaceuticals ETF ( XPH )

This fund provides an almost equal weight exposure to the pharma companies by tracking the S&P Pharmaceuticals Select Industry Index. With AUM of over $499.7 million, it trades in moderate volume of more than 228,000 shares a day and charges 35 bps in fees a year. In total, the product holds 44 securities with the in-focus five firms taking nearly 4% share each. The product was down 4.3% in the same period and has a Zacks ETF Rank of 3 or 'Hold' rating with a Medium risk outlook (read: What Does 2016 Hold in Store for Pharma ETFs ).

Market Vectors Pharmaceutical ETF ( PPH )

This ETF follows the Market Vectors US Listed Pharmaceutical 25 Index and holds 26 stocks in its basket. JNJ, PFE, MRK, LLY and BMY are among the top 14 holdings that make up for a combined 27.6% share. The product has amassed $348.6 million in its asset base and trades in a moderate volume of about 95,000 shares a day. Expense ratio came in at 0.36%. The fund has lost 2.7% over the past 10 days. It has a Zacks ETF Rank of 1 or 'Strong Buy' rating with a Medium risk outlook.

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PWRSH-DYN PHARM (PJP): ETF Research Reports

ISHARS-US PHARM (IHE): ETF Research Reports

SPDR-SP PHARMA (XPH): ETF Research Reports

MKT VEC-PHARMA (PPH): ETF Research Reports

JOHNSON & JOHNS (JNJ): Free Stock Analysis Report

LILLY ELI & CO (LLY): Free Stock Analysis Report

BRISTOL-MYERS (BMY): Free Stock Analysis Report

PFIZER INC (PFE): Free Stock Analysis Report

MERCK & CO INC (MRK): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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