While the health industry has underperformed so far this year, health care stocks and sector-related exchange traded funds can gain momentum on increased merger and acquisition activity.
About $144 billion in deals for biotechnology, health care and pharmaceutical companies have been announced this year, with Abbott Laboratories (ABT) agreeing to acquire St Jude Medical Inc. (STJ) for $25 billion and AbbVie Inc. (ABBV) buying Stemcentrx for $5.8 billion, Bloomberg reports.
Premiums on health care deals are also holding, with almost 30% of deals this year commanding premiums of 40% to 50%, mirroring premiums paid this time last year.
The rash of new deals is already up 27% on a dollar basis from a year ago when the industry was on its way to over a 12-year record in deal making. Businesses are expanding their product lines through acquisitions as they face increased competition and look to new merchandise to raise sales.
“We are likely see more M&A in health care this year as companies streamline their portfolios and seek to build up those areas of higher future growth,” Nigel Jones, co-head of health care at Linklaters law firm, told Bloomberg.
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More companies may continue to capitalize on the ongoing low interest rate environment and engage in greater merger and acquisitions, or at least try to squeeze out some deals before the Federal Reserve decides to hike rates again.
“Large M&A is likely to continue in the coming months, not only in health care but also in other sectors, as financing remains cheap and companies have loads of cash to put to use and expand their portfolios,” Tomasz Michalski, an economics professor at the HEC business school, told Bloomberg.
ETF investors can also capitalize on the spate of acquisitions through health care-related ETFs that tilt toward mid- and small-cap stocks, or smaller companies that are more likely to be buyout targets. For instance, the Guggenheim S&P Equal Weight Healthcare ETF (RYH) , which equally weights its component holdings, includes a 30.4% tilt toward mid-caps, alon gwith 48.3% large-caps and 21.4% mega-caps. The PowerShares S&P SmallCap Health Care Portfolio (PSCH) focuses more on smaller companies, with a 59.9% tilt toward small-caps and 40.1% in micro-caps.
Additionally, looking at biotechnology-related ETFs, the BioShares Biotechnology Clinical Trials Fund (BBC) tracks potential up-and-coming biotechnology companies that are in the clinical trials stage. The Loncar Cancer Immunotheraphy ETF (CNCR) tracks companies that are developing new classes of therapies. The ALPS Medical Breakthroughs ETF (SBIO) focuses on small- and mid-cap companies that have one or more drugs in either Phase II or Phase III U.S. FDA clinical trials. The broader SPDR S&P Biotech ETF (XBI) follows an equal-weight index of biotechnology companies, with 26.8% in micro-caps, 35.0% small-caps and 20.9% mid-caps.
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