The Xchange Blog

Pharma Earnings: The PILL to CURE Market Troubles?

While October’s troubles are still working their way through the markets, one thing that has managed to brighten the disposition of some traders is the positive earnings trend among some of the market’s traditional leaders. Banks and other financials posted healthy numbers, and even Netflix surprised everyone with a huge per share revenue beat and raised annual forecast.

However, due to the rising yield curve and persistent geopolitical risks, traders are still skeptical of a continued uptrend in the performance sectors. But, looking closely at a few pharmaceutical names might well change that, as evidenced by the sharp uptick in industry interest if one looks at the charts for the  Direxion Daily Pharmaceutical & Medical Bull 3X Shares ETF (PILL) and Direxion Daily Healthcare Bull 3X Shares ETF (CURE).

PILL vs. Dynamic Pharmaceutical Index

Data Range: 9/22/2018 – 10/23/2018. 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 vs. S&P Health Care Select Sector Index

Data Range: 9/22/2018 – 10/23/2018. 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.

 

Clearly, pharma names were not immune from the early October rout. However, the sharp spike in both charts mid-way through the month came following stellar early reports from Johnson & Johnson and UnitedHealth Group Inc. as well a solid beats and positive guidance from Abbott Laboratories.

While these early reports only offer a suggestion of what other biotech and healthcare names might have in store as far as revenue surprises, the sector might also have some added immunity to the interest rate sickness that is plaguing the broader markets.

For one, the biotech sector spent most of the past year expanding in a big way, In the first 3 quarters of 2018, 48 new biotech companies went public. This surge comes after 2017’s string of M&A deals that saw some massive consolidation, like Bristol-Myers Squibb’s $2.3 billion acquisition of IFM Therapeutics or Gilead Sciences, Inc’s $12 billion acquisition of Kite Pharmaceuticals.

If this weren’t indication enough that the industry is flush with cash (thanks in large part to profit repatriation that came with last year’s tax cuts) domestic biotechs are also receiving a huge surge in private funding from international investors. The biotech industry has already surpassed the $8.19 billion in private funding it received in 2017 and is closing in on $10 billion for 2018, much of which is coming from Chinese investors hoping to lure research to China.

While the ongoing U.S.-China trade war might threaten that cash stream if investments in biotech are put under review, the current setup works well for small, research-based companies looking to emerge into the equity market and the pharma giants eager to acquire them.

Of course, these medium-term catalysts are reliant on strong outlook and good borrowing conditions. Rising rates might put some debt pressure on the industry should inflation really ramp up over the coming months. But, if these companies continue the trend of posting strong earnings, and the crop of new firms remains thick on the ground, it’s likely that you can expect the cycle of IPO and M&A to continue driving valuations higher.

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 three times 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.
 
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 2,000 largest companies listed on both the NYSE MKT and NASDAQ exchanges. One cannot directly invest in an index.
 
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.
 
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.