Q2 Earnings Fail To Impress Pharma ETF

Total earnings for 83.3% of the total healthcare market capitalization are up 6% on revenue growth of 4.1%. Though earnings growth is weak compared with many other sectors, earnings and revenue beat ratios of 85% and 70%, respectively, are particularly encouraging. In fact, healthcare is the fourth sector that surprised investors the most on earnings, trailing aerospace, technology and materials.

Among the most notable players, Johnson & Johnson (NYSE:JNJ) was the first major drug company to report earnings on July 18, followed by Eli Lilly and Company (NYSE:LLY) and Bristol-Myers Squibb Company (NYSE:BMY) on July 25 and July 27, respectively. Two other major U.S. drug companies – Merck (NYSE:MRK) and Pfizer (NYSE:PFE) – reported on July 28 and August 1, respectively. These industry primes posted solid results with earnings beat while a few lagged 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 but narrowly missed the top–line estimate. Earnings per share came in at $1.83, 4 cents ahead of the Zacks Consensus Estimate and 5.2% higher than the year-ago quarter. Revenues grew 1.9% year over year to $18.84 billion but fell shy of the Zacks Consensus Estimate of $18.89 billion.

Johnson & Johnson raised its full-year earnings per share guidance to $7.12–$7.22 from $7.00–$7.15 and revenue guidance to $75.8–$76.1 billion from $75.4–$76.1 billion. The Zacks Consensus Estimate was pegged at $7.10 for earnings per share and $75.71 billion for revenues at time of earnings release. JNJ has gained 0.9% to date since its earnings announcement (read: J&J Brightens Outlook: Healthcare ETFs in Focus).

Pfizer Earnings in Focus

The U.S. drug giant beat on earnings but missed on revenues. Earnings per share of 67 cents came in couple of cents above the Zacks Consensus Estimate while revenues of $12.9 billion fell shy of our estimate of $13 billion. On an annual basis, earnings per share rose 5% and revenues declined 2%.

For 2017, Pfizer expects revenues in the range of $52-$54 billion and raised the lower end of the earnings per share guidance to $2.54-$2.60 from $2.50–$2.60. The Zacks Consensus Estimate is correctly pegged at $52.79 billion for revenues and $2.56 for earnings per share. Shares of PFE are up 1.8% since the earnings announcement.

Merck Earnings in Focus

Earnings per share came in at $1.01, surpassing the Zacks Consensus Estimate of 87 cents and improving 8.6% from the year-ago quarter. Revenues inched up 1% year over year to $9.93 billion and were above the Zacks Consensus Estimate of $9.79 billion.

Merck raised its revenue guidance from $39.1–$40.3 billion to $39.4-$40.4 billion while reiterated earnings per share projection at $3.76–$3.88 for this year. The Zacks Consensus Estimate is currently pegged at $40.32 billion for revenues and $3.86 for earnings per share. The stock has lost 0.3% following its earnings announcement.

Bristol-Myers Earnings in Focus

Bristol-Myers reported earnings per share of 74 cents, a penny ahead of our estimate and increased 7% from the year-ago quarter. Revenues grew 6% to $5.14 billion and edged past the Zacks Consensus Estimate of $5.07 billion.

The company raised its low end of earnings per share guidance to $2.90-$3.00 from $2.85-$3.00 for this year. The Zacks Consensus Estimate at the time of the earnings announcement was pegged at $2.94. Shares of BMY are down 0.9% to date since the earnings announcement (see: all the Healthcare ETFs here).

Eli Lilly Earnings in Focus

Earnings of $1.11 at Eli Lilly outpaced the Zacks Consensus Estimate by seven cents and came in 29% higher than the year-ago quarter. Revenues grew 8% to $5.82 billion and beat our estimate of $5.59 billion.

Like other drug makers, Eli Lilly also raised its 2017 revenue and earnings guidance. It now expects revenues in the range of $22.0–$22.5 billion compared with the previous expectation of $21.8–$22.3 billion and earnings per share in the range of $4.10-$4.20 versus $4.05-$4.15 expected previously. The Zacks Consensus Estimate at the time of the earnings release was pegged at $22.18 billion for revenues and $4.12 for earnings per share. Shares of LLY have lost 3.3% since the earnings release.

ETF Angle

The string of earnings beat failed to boost pharma ETFs as they saw rough trading over the past 10 days. Below, we have highlighted them in detail:

PowerShares Dynamic Pharmaceuticals Fund (WA: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 $722.9 million and sees moderate volume of around 70,000 shares a day. The fund charges 57 bps in fees and expenses. Holding 30 stocks, the fund invests around 5% share each in the in-focus five firms. The ETF has lost 4.3% over the past 10 days and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook (read: What Lies Ahead for Pharma ETFs in Second Half 2017).

iShares U.S. Pharmaceuticals ETF IHE

This ETF provides exposure to 41 pharma stocks by tracking the Dow Jones U.S. Select Pharmaceuticals Index. The in-focus firms are among the top six holding in the basket accounting for a combined 38.2% of total assets, suggesting heavy concentration. The product has $691.9 million in AUM and charges 44 bps in fees and expense. Volume is light as it exchanges about 18,000 shares a day. The fund has shed 4% over the past 10 days and has a Zacks ETF Rank of 2 or ‘Buy’ rating with a High risk outlook.

SPDR S&P Pharmaceuticals ETF (HN:XPH)

This fund provides exposure to the pharma companies by tracking the S&P Pharmaceuticals Select Industry Index. With AUM of $448.7 million, it trades in good volume of around 116,000 shares a day and charges 35 bps in fees a year. In total, the product holds 40 securities with the in-focus five firms taking over 4% share each. The product was down 6.6% in the same period and has a Zacks ETF Rank of 2 with a High risk outlook.

VanEck Vectors Pharmaceutical ETF (V:PP)

This ETF follows the MVIS US Listed Pharmaceutical 25 Index and holds 26 stocks in its basket. Johnson & Johnson takes the top spot in the basket with 9% of assets while Pfizer, Bristol-Myers, Merck and Eli Lilly collectively accounts for 20% of assets. The product has amassed $279.3 million in its asset base and trades in a moderate volume of about 119,000 shares a day. Expense ratio comes in at 0.35%. The fund has lost 6.3% over the past 10 days. It has a Zacks ETF Rank of 3 with a Medium risk outlook (read: ETFs to Buy/Avoid After Healthcare Bill Failure).



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