Short Investors Exit Health-Care ETF Hot Spot Amid Drug Deals

Apr 25, 2014 4:15 pm ET

April 25 (Bloomberg) -- Health-care exchange-traded funds are retreating as an investor favorite after the world’s top pharmaceutical companies engaged in their biggest deals in the past five years.

Investors pulled a net of $867.5 million from exchange- traded funds focused on health care in the past five days through yesterday, more than any other sector, according to data compiled by Bloomberg. Health-care ETFs had gained the most deposits in 2014 through April 18. As $148 million in proposed or announced takeovers occurred this week among major pharmaceutical companies, the funds’ net deposits had fallen by today behind real estate and energy ETFs.

Short-term investors are pulling out of health care amid the merger-and-acquisition activity to look for sectors with less risk, said Tim Ghriskey, chief investment officer at New York-based Solaris Asset Management LLC, which helps manage about $1.5 billion in assets.

“What’s happening in pharma has certainly changed the game,” Ghriskey said today in a telephone interview. “Until investors decide what it means to the companies and to the overall health-care sector, uncertainty makes investors and traders pull back.”

Among the deals proposed or announced this week were Novartis AG’s $16 billion purchase of GlaxoSmithKline Plc’s oncology business, Eli Lilly & Co.’s acquisition of Novartis’s animal health business for $5.4 billion and Valeant Pharmaceuticals International Inc.’s $45.7 billion unsolicited takeover bid for Allergan Inc., the maker of the Botox wrinkle treatment.

Biotechnology Fueled

The rally of almost $3.7 billion in health-care ETFs in 2014 is attributed to biotechnology companies bringing new drugs to market, debunking the concern that big-selling medicines are reaching a peak as patents wear off.

The cost of expensive pharmaceutical deals is offsetting this confidence, said James Abate, who oversees about $1 billion as chief investment officer of Centre Asset Management in New York.

“I don’t look at this as a positive thing for big pharmaceutical companies,” Abate said in a phone interview. “It highlights the difficulty that exists in being able to drive profit growth with sales growth.”

Investors also have tempered their confidence in biotechnology stocks, with the Nasdaq Biotechnology Index of 121 companies falling 16 percent since its high on Feb. 25.

“We’ve brought a lot of money in the group,” said Eddie Yoon, who manages $11.3 billion as a portfolio manager at Fidelity Investments, in a phone interview from New York. “It’s time to take a step back and think about what we own and why we own it.”

Positive Signs

In the midst of the pharmaceutical dealing, the S&P Healthcare Index of 54 companies gained 3.7 percent this year through yesterday.

“What we don’t talk about is that there are other parts of the market place that have performed well,” Yoon said. “I continue to see good ideas for shareholder returns going forward.”

Yoon said medical-device companies and some drug companies are good areas for investment, and the industry consolidation means higher earnings potential for big-name pharmaceuticals.

“The worst is over,” Centre’s Abate said. “We don’t think the recent correction is a harbinger of what is to come.”