2014 turned out to be one of the most active years in the pharma sector where mergers and acquisitions (M&As) and licensing agreements are concerned and these deals are not showing any signs of slowing down. AbbVie’s $21 billion acquisition agreement with Pharmacyclics, announced in Mar 2015, is one of the biggest deals to be announced in recent times.

The deal goes to show that lofty valuations will not deter large companies from pursuing acquisitions to boost their pipelines and product portfolios. Other major deals include the ones involving Actavis – Allergan, Shire-NPS Pharmaceuticals, Endo – Auxilium and Salix, and Pfizer-Hospira.

Meanwhile, we expect small bolt-on acquisitions to continue. In-licensing activities and collaborations for the development of pipeline candidates have also increased significantly. Several pharma companies are focusing on in-licensing mid-to-late stage pipeline candidates that look promising, instead of developing a product from scratch, which involves a lot of funds and time. ((Read: Healthcare ETFs in Focus Post JNJ Earnings Beat)
 
Therapeutic areas attracting a lot of interest include central nervous system disorders, diabetes and immunology/inflammation. The hepatitis C virus market is also attracting a lot of attention. Another lucrative area is immuno-oncology as these therapies have the potential to change the treatment paradigm for cancer -- they basically use the natural capability of the patient's own immune system to fight the cancer. Major players in this field include Bristol-Myers, AstraZeneca, Merck and Roche. Deals targeting immuno-oncology are being inked by companies like Pfizer, Merck KGaA, Bristol-Myers, AstraZeneca and Incyte.
 
Restructuring activities are also gaining momentum as large pharma companies are looking to cut costs and streamline their operations. Most of these companies are re-evaluating their pipelines and discontinuing programs which do not have a favorable risk-benefit profile. (Read:  Pharma ETFs Soar on Acquisition Spree)
 
Another recent trend is the divestment/monetization of non-core assets so that the companies may focus on their core areas of expertise. Biosimilars and emerging markets are also a focus area. Pfizer’s upcoming acquisition of Hospira will give the company a strong position in the biosimilars market. Companies like Merck and Novartis are involved in the development of biosimilars as well – in fact, Novartis’ Sandoz was the first company to gain approval for a biosimilar in the U.S. 
 
New products are steadily gaining traction and contributing significantly to sales and so far in 2015, the FDA has approved 10 new molecular entities (NMEs) and biological products.
 
Meanwhile, pharma companies with a strong presence in international markets will feel the pressure of the strengthening dollar in 2015. (Read: Forget Biotech, Buy these Top-Ranked Healthcare ETFs)
 
Pharma ETFs in Focus
 
Highlighted below are some pharma ETFs which present a low-cost and convenient way to get a diversified exposure to the sector.

Powershares Dynamic Pharmaceuticals ETF (PJP - ETF report)

 PJP, launched in Jun 2005 by Invesco PowerShares, tracks the Dynamic Pharmaceuticals Intellidex Index. The fund covers only health care stocks. The top 3 holdings include Biogen (5.21%), Amgen (5.19%) and Bristol-Myers Squibb (5.16%). The total assets of the fund as of Apr 16, 2015 were $2,040.8 million representing 25 holdings. The fund’s expense ratio is 0.58% while dividend yield is 0.42%. The trading volume is roughly 133,630 shares per day.
 
SPDR S&P Pharmaceuticals ETF (XPH - ETF report)
 
XPH, launched in Jun 2006, tracks the S&P Pharmaceuticals Select Industry Index. This ETF covers pharma stocks with the top 3 holdings being Horizon Pharma plc (3.89%), Akorn Inc. (3.78%) and Perrigo Co. plc (3.62%). Perrigo has received an acquisition proposal from Mylan for $205 per share.
 
Total assets as of Apr 15, 2015 were $1,267.94 million representing 40 holdings. The fund’s expense ratio is 0.35% and dividend yield is 0.61%. The trading volume is roughly 58,417 shares per day.
 
iShares U.S. Pharmaceuticals (IHE - ETF report)
 
IHE, launched in May 2006, seeks investment results that correspond generally to the price and yield performance of the Dow Jones U.S. Select Pharmaceuticals Index. The fund mainly consists of pharma companies (87.31%). Biotech companies account for about 12.36% of the fund.
 
The top 3 holdings of this fund are large-cap pharma companies are Johnson & Johnson (9.44%), Pfizer (8.64%) and Merck 7.78%). The total assets of the fund as of Apr 16, 2015 were $1,204.09 million representing 39 holdings. The fund’s expense ratio is 0.43% with the dividend yield being 1.01%. The trading volume is roughly 40,204 shares per day.
 
Market Vectors Pharmaceutical (PPH - ETF report)
 
PPH was launched in Dec 2011 and tracks the Market Vectors U.S. Listed Pharmaceutical 25 Index. The top 3 holdings of this fund are large-cap pharma companies - Novartis (9.53%), Johnson & Johnson (8.26%), and Pfizer (6.81%). The total assets as of Apr 16, 2015 were $382.7 million representing 26 holdings. While the expense ratio is 0.35%, dividend yield is 1.66%. The trading volume is roughly 66,679 shares per day.
 
Conclusion

While EU austerity measures, negative currency impact and pricing pressure remain headwinds, the pharma industry is out of the worst of its genericization phase. Many companies, which had faced generic headwinds in the last couple of years, should continue to see a sustained improvement in results this year. Cost-cutting, downsizing, emerging markets and new products should support growth.
 
The NYSE ARCA Pharmaceutical Index is up almost 19% over the last year. Increased pipeline visibility and appropriate utilization of cash should increase confidence in the sector.
 
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