With health care remaining a major issue in today’s political and financial world, big pharmaceutical firms have been under the microscope for some time. Legislation earlier this year from Washington created quite a buzz, as the bill executed an overhaul of our entire health care system. On top of this, many big pharma firms who have been coasting along with their big name drugs, are fast approaching a patent cliff, suggesting that some of their most popular drugs– and important revenue streams– are likely to disappear as they go generic in the coming years. When this happens, it could be a very difficult time for the pharmaceutical industry which makes the time before the cliff all the more important as companies scramble to shore up their product lines and get their balance sheets in order before their products lose their patent protection [see also Is Your Biotech ETF A Leader Or Laggard?].
Aside from losing their patents, the individual companies’ overall performance has also been scrutinized in this poor economic environment even though the demand for a good portion of their products are relatively inelastic since many rely on these drugs for survival. Sales remain sluggish across much of the industry and a wave of consolidation has spread across the sector as some of the larger firms scoop up mid cap companies that have more robust product pipelines. Today, Merck & Co., another big name in health care, will release their earnings from the third quarter of 2010 and should help to give some direction to the choppy sector. Merck & Co. is one of the largest pharmaceutical companies in the world, producing big name drugs like Vytorin and Singulair. Like other giants in this industry, Merck has had a tough year, losing over 15% in their share price, but their earnings today may turn things around [see also India ETFs: Five Ways To Play].
Analyst estimates look good for the pharma giant; the firm is expected to haul in EPS of $0.82 with revenues of $11.23 billion. These figures represent a robust 85% sales growth from the third quarter of 2009, showing a significant turnaround in the financial status of the company even if it hasn’t been rewarded by the stock market. Investors should note that Merck has either met or surpassed analyst estimates for the last four fiscal quarters, setting the bar high for today’s release. The company will report before market open, and will likely be a big mover on the day [see also Next Frontier Of ETF Investing: Long/Short Trades].
In light of this major data release, the SPDR Select Sector Fund – Health Care (XLV) will be today’s ETF to watch. This fund tracks the Health Care Select Sector Index, which includes companies from the various sub-sectors of the health care industry. Merck accounts for 9.4% of the ETF’s assets; other top holdings include Johnson & Johnson (14.2%), and Abbott (5.7%). Though XLV has been up and down this year, the ETF has returned a total of 0.84% with a dividend yield of 1.87%. If Merck meets their marks, look for this ETF to reap the benefits, but if the earnings come up short, XLV may face a rocky day of trading to close out October.
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Disclosure: No positions at time of writing.