The Xchange Blog

Pharma Trade: A No-Brainer?

As earnings season heats up, the market is contending with a lot of uncertainty. On one hand, the continuing threat of trade tariffs is hanging over head, and nobody’s really sure when the market will start to care. On the other hand, recent earnings have been strong, and the expectations for this quarter are calling for continued growth.

One area of the market that stands out is biotech. Up more than 40 and 25 percent from the start of April, respectively, Direxion’s Daily Pharmaceutical & Medical Bull 3X Shares ETF (PILL) and Daily Healthcare Bull 3X Shares ETF (CURE) are solid examples of the momentum in pharma that emerged late in 2017 and shows little signs of abating.

PILL Performance

Data Range: 4/1/2018 – 7/19/2018. Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the performance quoted. For standardized performance and the most recent month-end performance, click here.

 

CURE Performance

Data Range: 4/1/2018 – 7/19/2018. Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the performance quoted. For standardized performance and the most recent month-end performance, click here.

 

Beyond the trend of positive earnings per share surprises from the likes of Pfizer, Eli Lilly and Regeneron Pharmaceuticals, there are a host of other factors that make big pharma the clear favorite going into Q2 earnings season. Not the least of which was the FDA’s recent approval of an experimental treatment for alzheimer’s disease from Biogen that boosted the company’s stock by nearly 20 percent in a matter of hours.

However, what has truly enhanced the growth in biotech is the long sequence of M&A and IPO announcements that have taken place in the cash-flush industry. In late 2017 to early 2018, three acquisitions from Sanofi SA, Celgene Corporation and Gilead Sciences alone had the pharma giants moving $30 billion in capital. And Q1 2018 racked up about $47 billion in M&A. On top of that, here have already been 33 IPOs over the first seven months of the year alone.

All that to say, traders should be on the lookout when the biotechs come to bat this earnings season, as the sector has been hot.

Eight major pharma companies report between July 24-27, including:

  • Biogen Inc. – 7/24, premarket
  • Eli Lilly And Co – 7/24, premarket
  • Amgen, Inc.  – 7/24, after-market
  • Gilead Sciences, Inc.  – 7/25, after-market
  • Bristol-Myers Squibb Co  – 7/26, premarket
  • Celgene Corporation  – 7/26, premarket
  • AbbVie Inc  – 7/27, premarket
  • Merck & Co., Inc. –  7/27, premarket

As always, keep in mind that a stock’s performance heading into an earnings report can often dictate the reaction to the actual numbers, regardless of what the numbers say. The market will want to see these companies beat expectations on their sales and EPS numbers. If not, we could be in for some weakness.  

This week is likely to set the tone for the biotech sector for the next several weeks or months, so be on the lookout for what trend is set by these reports.

 

Related Leveraged ETFs

 


Each leveraged ETF seeks investment results that are 300% of the return of its benchmark index for a single day. Each Fund should not be expected to provide returns which are the return of benchmark’s cumulative return for periods greater than a day. Investing in a Direxion Shares ETF may be more volatile than investing in broadly diversified funds. The use of leverage by a Fund increases the risk to the Fund. The Direxion Shares ETFs are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged investment results and intend to actively monitor and manage their investment.
 
PILL Risks – An investment in the Fund involves risk, including the possible loss of principal. The Fund is non-diversified and includes risks associated with the Fund concentrating its investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. The Fund does not attempt to, and should not be expected to, provide returns which are three times the performance of its underlying index for periods other than a single day. Risks of the Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Counterparty Risk, Intra-Day Investment Risk, Daily Index Correlation/Tracking Risk, Other Investment Companies (including ETFs) Risk, and risks specific to investment in the securities of the Biotechnology Industry, Healthcare Sector and Pharmaceutical Industry. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.
 
CURE Risks – An investment in the Fund involves risk, including the possible loss of principal. The Fund is non-diversified and includes risks associated with the Fund’s concentrating its investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause its price to fluctuate over time. The Fund does not attempt to, and should not be expected to, provide returns which are three times the performance of its underlying index for periods other than a single day. Risks of the Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Counterparty Risk, Intra-Day Investment Risk, Daily Index Correlation/Tracking Risk, Other Investment Companies (including ETFs) Risk and risks specific to investment in the securities of the Health Care Sector. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.
 
Dynamic Pharmaceutical Intellidex Index (DZRTR) – Consists of common shares of companies that are principally engaged in research, development, manufacture, sale or distribution of pharmaceuticals and drugs of all types. The Index may include pharmaceutical companies and other companies that facilitate the testing or regulatory approval of drugs. The NYSE Arca, Inc. (the “Index Provider”) includes larger and smaller companies from the largest 2,000 companies listed on both the NYSE and NASDAQ exchanges. One cannot directly invest in an index.
 
Health Care Select Sector Index (IXVTR) – Provided by Standard & Poor’s and includes domestic companies from the healthcare sector, which includes the following industries: pharmaceuticals; health care equipment and supplies; health care providers and services; biotechnology; life sciences tools and services; and health care technology. One cannot directly invest in an index.