The healthcare sector has been lackluster this earnings season, and without supporting factors such as price increases or increased mergers and acquisitions to bolster the segment, pharmaceutical exchange traded funds could suffer through a weak start to the second quarter.
Year-to-date, the PowerShares Dynamic Pharmaceuticals Portfolio (NYSEArca: PJP) rose 5.6%, SPDR Pharmaceuticals ETF (NYSEArca: XPH) gained 6.2%, iShares U.S. Pharmaceuticals ETF (NYSEArca: IHE) added 5.1%, VanEck Vectors Pharmaceutical ETF (NYSEArca: PPH) returned 2.6% and VanEck Vectors Generic Drugs ETF (NasdaqGM: GNRX) was up 3.2%.
First quarter earnings for the pharmaceuticals segment will fire up this week, and early signs don’t seem too promising after bellwether Jonson & Johnson (NYSE: JNJ) revealed just 1.4% growth in its pharma business last week, reports Charley Grant for the Wall Street Journal.
Drug wholesaler Cardinal Health (NYSE: CAH) also announced a profit warning that weighed on the whole sector as well.
Analysts also anticipate negative or modest sales growth year-over-year at three of the four largest biotech names, including Amgen (NasdaqGS: AMGN), Biogen (NasdaqGS: BIIB) and Gilead Sciences (NasdaqGS: GILD), which analysts project will reveal top-line decline of 15%.
Weighing on the pharmaceuticals segment, the business of raising drug prices and buying profitable upstarts have grown more difficult.
Analysts at Credit Suisse showed that U.S. price increases totaled 6% after rebates and discounts among 28 global drugmakers in 2016. Moreover, price increase might have mitigated deteriorating bottom lines in some cases.
Meanwhile, political factors weigh on the pharma industry, keeping the sector from raising prices to boost profits. If companies hike prices, it may triger tighter regulation, but not raising prices means slower growth for investors.
Furthermore, it is harder to find a bargain among upstarts as most of the high-quality assets have been picked over.
Consequently, some traders may look to leveraged options to potentially capitalize on short-term surprises. For instance, the Direxion Daily Pharmaceutical & Medical Bull 2X Shares (NYSE: PILL) and the Direxion Daily Pharmaceutical & Medical Bear 2X Shares (NYSE: PILS) both follow the Dynamic Pharamaceuticals Intellidex Index, the same index tracked by the PowerShares Dynamic Pharmaceuticals Portfolio (NYSEArca: PJP).
ETF traders who are betting big on the biotechnology sector rebound have also utilized leveraged long options including the Direxion Daily S&P Biotech Bull Shares (NYSEArca: LABU), which takes the 3x or 300% daily performance of the S&P Biotechnology Select Industry Index, or the or the Direxion Daily S&P Biotech Bear Shares (NYSEArca: LABD) to hedge against further turns.
Other options include the ProShares UltraPro Nasdaq Biotechnology (NasdaqGM: UBIO), which takes the 3x daily performance of the Nasdaq Biotechnology Index, and the ProShares Ultra Nasdaq Biotechnology (NasdaqGM: BIB), which takes the 2x performance of the same benchmark.
For more information on the pharma sector, visit our pharmaceuticals category.