ETFs For The Next Pharma Takeover Candidates

Investors were reminded Monday that the healthcare sector remains this year’s premiere destination for large-scale mergers and acquisitions activity when Israel’s Teva Pharmaceuticals TEVA agreed to pay $40.5 billion in cash and stock for Allergan PLC AGN's generic drugs unit.

That does not represent the end of pharmaceuticals M&A activity. It probably doesn’t and there are several exchange traded funds that should benefit from more consolidation in the pharmaceuticals industry.

The $409 million Market Vectors Pharmaceutical ETF PPH is a good place to look for potential pharma buyers and sellers. Home to 26 stocks, PPH features plenty of buyers and potential buyers, including a 5.4 percent weight to Teva and an almost 5.5 percent weight to Dow component Pfizer Inc. PFE, a company that has been champing at the bit to execute a big deal.

What makes PPH more compelling as a pharma M&A play are comments from Allergan CEO Brent Saunders indicating his company could set its sites on bigger names such as AbbVie ABBV or Biogen Inc BIIB. That is just talk, but PPH allocates 5 percent of its weight to AbbVie. 

Additionally, PPH also features a combined weight of nearly 5 percent to Mylan NV MYL, which has tanked in the wake of Teva’s buy of Allergan’s generics unit, and Perrigo PRGO. Mylan is trying to acquire Perrigo, but has been rebuffed twice, potentially forcing the former to make a more compelling offer or look for new targets.

Other PPH holdings that have previously been rumored to be potential targets include Jazz Pharmaceuticals JAZZ and Mallinckrodt PLC MNK.

In a media report out on Monday, RBC Capital Markets identified Akorn, Inc. AKRX, Sagent Pharmaceuticals SGNT and Impax Laboratories IPXL as companies that will have a chance to grow as larger specialty pharma firms combine or are snatched up by bigger rivals.

Those stocks combine for 7.2 percent of the SPDR S&P Pharmaceuticals (ETF) XPH. As an equal-weight ETF, XPH is not excessively exposed to any of its 40 holdings. That mutes the impact one deal can have on the ETF.

However, XPH does not lack for potential buyers and sellers in pharma M&A. At least five XPH holdings have been mentioned as credible takeover targets, while at least a quarter of the ETF’s constituents, names such as Allergan, Abbvie and Johnson & Johnson JNJ, have the ability to get big deals done.

XPH is up 34 percent over the past year, while PPH is higher by about 20 percent over the same period.