The biotech sector stood out last year and the NASDAQ Biotechnology Index delivered a stellar 34% return for 2014.

Despite some temporary glitches and rough trading in between; encouraging industry trends, increasing merger and acquisition activities, several important product approvals and label expansions, ever-increasing health care spending and an aging population led the sector to easily outperform the broader U.S. equity markets (read: 3 Biotech ETF Winners from 2014's Best Performing Sector).

The strong performance continued into the New Year with most of the biotech ETFs trading in the green in the year-to-date frame. However, the industry has started to show some weakness lately. Unlike the third quarter wherein most of the well-known industry players easily managed to beat our estimates on both earnings and revenues, the fourth quarter saw some of them reporting mixed financial results.

Though the top players like Gilead (GILD) and Amgen (AMGN - Analyst Report) have reported strong results, a not-so-inspiring outlook by Gilead continued to hammer the company’s stock prices post earnings. Pricing war in the hepatitis C virus (HCV) market has led the company to guide revenues for 2015 lower than Street estimates (read: Gilead Falls on AbbVie and Express Scripts Deal: 3 Biotech ETFs to Watch).

Biotech Earnings in Focus

GILD Earnings in Focus 

The company reported solid fourth-quarter numbers as net income more than quadrupled to an adjusted $3.88 billion from $930 million in the year-ago quarter.  Adjusted earnings per share came in at $2.43, easily surpassing the Zacks Consensus Estimate of $2.27.  Revenues rose 134.3% to $7.31 billion topping our estimates of $6.69 billion.

Strong sales of the HCV drugs, Harvoni and Sovaldi, helped boost net profits, beating Wall Street forecasts. Sales of Sovaldi came in at $1.73 billion for the reported quarter, while sales of the improved combination drug – Harvoni – totaled $2.11 billion.

Gilead declared its first quarterly dividend of 43 cents, or $1.72 annually, which will be paid from the second quarter of 2015, pending approval. The company will also begin a $15 billion share repurchasing program to be completed within five years.

However, the company said it plans to offer steeper-than-expected discounts on its HCV drugs to health insurers and other group payers which made investors jittery. The high costs of Sovaldi and Harvoni have intensified competition with AbbVie Inc (ABBV) and its much cheaper HCV treatment Viekira Pak in the market. The discounts Gilead plans to offer this year will hurt its top line, leading to a sales estimate of $26 billion to $27 billion from the company for 2015, below the average Wall Street estimate of $28.6 billion.

AMGN Earnings in Focus

The company reported earnings of $2.16 per share, well above the Zacks Consensus Estimate of $2.05, driven by higher revenues. Moreover, total revenues increased 6.4% to $5,331 million in the reported quarter, beating the Zacks Consensus Estimate of $5,192 million.

Amgen maintained its previously issued guidance for 2015. The company expects to earn $9.05–$9.40 per share on total revenues of $20.8 billion to $21.3 billion. The Zacks Consensus Estimate for earnings and revenues are $9.35 per share and $20.9 billion, respectively.

BIIB Earnings in Focus

Biogen (BIIB - Analyst Report) reported mixed fourth quarter results, beating the bottom-line estimates, but marginally missing on the top line. However, the company provided a strong outlook for 2015 and expects earnings in the range of $16.60–$17.00 per share on revenue growth of 14–16%.

Alexion Earnings

Alexion (ALXN - Analyst Report) also reported mixed fourth quarter results, beating on revenues, but missing the earnings estimates. The company provided a disappointing outlook for 2015 and expects net product sales in the range of $2.55–$2.6 billion, below the Zacks Consensus Estimate of $2.72 billion.

Market Impact

Given the disappointing revenue guidance due to steeper-than-expected discounts on anti-viral drugs, Gilead’s shares plunged 4.5% in after-market trading on the day of the earnings release. Also, the stock closed 8% lower on Feb 4. Weakness in Gilead has fueled concerns about pricing pressure on the overall biotech sector, dragging down other players. Amgen shares are trading more than 1.5% lower post its results, while Alexion shares have plunged more than 5% post earnings.

The dull performance of these companies has put biotech ETFs in focus. Investors should carefully watch the movement of these funds and take advantage of any opportunity that arises.

iShares Nasdaq Biotechnology ETF (IBB - ETF report) 

This fund provides exposure to 151 firms by tracking the Nasdaq Biotechnology Index. IBB is one of the most popular funds in the biotech space with an AUM of $7.2 billion and an average trading volume of 1.4 million shares (see: all the Healthcare ETFs here).

Biogen, Gilead, Celgene and Amgen are the top four holdings with 9.8%, 8.3%, 7.9% and 7.1% allocations, respectively. The ETF has lost 2.5% in the past one week but is up 33.5% in the past one year. IBB currently has a Zacks ETF Rank #2 or Buy rating.

Market Vectors Biotech ETF (BBH - ETF report)
 
This fund tracks the Market Vectors US Listed Biotech 25 Index, holding 26 securities in the basket. The product has so far amassed $722.8 million in its asset base and sees moderate trading volumes of roughly 148,000 shares a day. Gilead, Amgen, Celgene and Biogen occupy the top four spots in the fund, with a combined exposure of more than 40%. The fund has lost 2.4% in the past five trading sessions but is up 24.5% in the past one year. BBH currently has a Zacks ETF Rank #1 or Strong Buy rating.

Dynamic Biotech & Genome (PBE - ETF report)

This fund provides exposure to 30 firms by tracking the Dynamic Biotech & Genome Intellidex Index. Biogen, Gilead and Amgen are among the top 10 holdings with a combined exposure of 16%.

The product has amassed $1492.3 million in its asset base while it trades in lower volumes of 71,000 shares per day. PBE has lost 2.8% in the past one week and currently has a Zacks ETF Rank #2 or Buy rating (read: The Complete Guide to Biotech ETFs).