Merger mania in the health care sector is on full display Monday after Swiss pharmaceuticals giant Roche announced Sunday it will acquire InterMune (NasdaqGS: ITMN) for $8.3 billion in cash.
The news, which has bolstered shares of several biotechnology exchange traded funds that hold shares of InterMune, highlights robust appetite by cash-rich big pharma companies to acquire their smaller, more nimble counterparts. Roche’s deal for InterMune also underscores why so many hedge funds are enthralled with pharma stocks. [InterMune Deal Ignites These Pharma ETFs]
Last week, the Wall Street Journal highlighted the list of 50 stocks that matter most to hedge funds with list being comprised of “positions that appear most frequently as top-10 holdings within hedge-fund portfolios as of the end of the second quarter,” according to the Journal.
The list is led by Actavis (NYSE: ACT), which was a top-10 holding for 67 hedge funds at the end of the second quarter, notes the Journal. Not far behind is Botox maker Allergan (NYSE: AGN). The California-based company was a top-10 holding at 41 hedge funds at the end of the second quarter.
Several dedicated pharma ETFs offer investors the opportunity to follow the smart money and grab exposure to hedge funds’ favorite pharma holdings. The $905.3 million SPDR Pharmaceuticals ETF (NYSEArca: XPH) is a fine example.
An ETF that has frequently been in the limelight due to health care mergers and acquisitions rumors and announcements, XPH features a combined 7% weight to Actavis and Allergan. XPH’s exposure to takeover candidates has helped drive the ETF to a 15.7% year-to-date gain.
Perrigo (NYSE: PRGO), Jazz Pharmaceuticals (NasdaqGS: JAZZ) and most recently, Salix Pharmaceuticals (NasdaqGS: SLXP), among others, have been mentioned as takeover targets. Those stocks combine for 12% of XPH’s weight with Salix, a potential target for Allergan, being the ETF’s largest holding at almost 4.8%. [Some ETFs Salivating Over a Salix Takeover]
Investors are liking XPH’s exposure to hedge fund darling stocks and takeover candidates as the ETF has added almost $20 million in new assets in just the past week.
The $695.6 million iShares U.S. Pharmaceuticals ETF (NYSEArca: IHE) is another ETF with good exposure to hedge fund faves. IHE has a combined weight of 12.5% to Actavis and Allergan. The fund allocates another 9.5% to Perrigo, Salix and Jazz, according to iShares data.
XPH and IHE have another potential catalyst in the form of Mallinckrodt (NYSE: MNK). Not only has the Ireland-based specialty pharma maker spent time as one of the most heavily shorted stocks this year, giving it exposure to the potential of a short-covering rally, but hedge funds are also stepping into Mallinckrodt from the long side.
Hedge funds, including John Paulson’s Paulson & Co. and Jana Partners, increased their long exposure to Mallinckrodt by 19.4% from the end of the first quarter through the end of the second. The stock has a weight north of 3.5% in both XPH and IHE.
SPDR Pharmaceuticals ETF
ETF Trends editorial team contributed to this post.