The Xchange Blog

Biotech, M&A, and IPOs. Oh My!

In the midst of a market upended by trade fears, uncertain commodity futures and interest rate hikes, the biotech and pharmaceutical industries have managed to maintain an impressive resilience to these market-wide worries. Over the course of Q2 2018, the Direxion Daily Pharmaceutical & Medical Bull 3X Shares ETF (PILL) and Direxion Daily S&P Biotech Bull 3X Shares ETF (LABU) have climbed by 40 and 55 percent, respectively.

PILL Performance

Data Range: 4/1/2018 – 6/30/2018. 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.

 

LABU Performance

Data Range: 4/1/2018 – 6/30/2018. 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.

 

The strength in the pharma space isn’t a new phenomenon, the sector ended 2017 with a handful of high-profile acquisitions from Celgene Corporation, Sanofi SA and Gilead Sciences Inc. However, these deals, collectively worth tens of billions of dollars, were just the start. 2018 has seen a continuation of this trend of M&A from those names as well as others, like Eli Lilly’s $1.6 billion dollar deal for ARMO BioSciences or Novartis AG’s $8.7 billion bid for AveXis.

The primary catalyst behind this spending spree is the windfall many of these companies gained from the new U.S. tax structure that lowered corporate tax rate from 35 to 21 percent while also permitting companies to repatriate revenue stockpiled offshore at the lower rate. This is enormously beneficial to pharmaceutical companies, who tend to hoard offshore profits. The last time companies experienced such a tax holiday in 2004, Pfizer Inc. repatriated $37 billion for dividend and stock buyback programs.

While that may shed light on where the M&A money came from, there has also been an upswing in new pharmaceutical companies entering the equity market. So far, 2018 has seen 32 IPOs in the biotech space, just a dozen shy of the total number of biotech IPOs in 2017. These companies seemingly can’t appear fast enough, as investors have pounced on the new listings, driving their share price up by as much as 60 percent in the case of recent IPO AvroBio.

 

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.
 
LABU Risks – An investment in the Fund involves risk, including the possible loss of principal. The Funds is non-diversified and include risks associated with the Funds’ concentrating its investments in a particular industry, sector, or geography which can increase 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 their 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, risks specific to investment in the securities of the Biotechnology Industry and Healthcare Sector, Daily Index Correlation/Tracking Risk and Other Investment Companies (including ETFs) Risk. 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.
 
S&P Biotechnology Select Industry Index (SPSIBITR) – Provided by Standard & Poor’s and includes domestic companies from the biotechnology industry. The Index is designed to measure the performance of the biotechnology sub-industry based on the Global Industry Classification Standards (GICS). One cannot directly invest in an index.