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Biotech ETFs Soar on Pfizer-Anacor Deal: SBIO, XBI in Lead

The largest U.S. drug maker Pfizer (PFE) struck a deal to acquire the skin drug maker Anacor Pharmaceuticals (ANAC) for $5.2 billion. Pfizer entered into this deal after the $160-billion megamerger with Botox-maker Allergan (AGN) was scrapped due to the new tax inversion rules (read: New Tax Inversions Rules: Threats to Healthcare ETFs?).

Under the terms of the deal, Pfizer will pay $99.25 per share in cash through a cash tender offer, reflecting a 55% premium over Anacor’s closing stock price on May 13. The acquisition, expected to be completed in the third quarter of this year, has already been approved by the board of directors of both companies and is seeking approval from shareholders and regulators. The transaction will be slightly dilutive to Pfizer earnings in 2017 but accretive from the start of 2018.

The deal will allow Pfizer to gain control exclusively over Anacor’s flagship asset – crisaborole – an experimental nonsteroidal topical gel treatment of mild-to-moderate atopic dermatitis known as eczema. In phase 3 clinical trials, crisaborole reported strong results and was accepted for FDA review to treat mild-to-moderate atopic dermatitis in children and adults in March. If approved on January 7, 2017, Pfizer expects the drug to generate annual sales of $2 billion. The buyout will bolster its inflammation and immunology drug business and add a new stream of revenue growth to Pfizer’s innovate business.

About 18–25 million people in the U.S. have the chronic inflammatory skin disorder, which causes inflammation and itching often in skin folds with symptoms lasting for two weeks or more. It is particularly common in infants and children. And as no drug has been approved for the illness over the last 15 years, this new Anacor drug could make a huge difference.

Market Impact

With the potential to dominate the atopic dermatitis market, ANAC soared 57.2% on the day to finish above the $100 per share mark, while its crushed its average volume figures, as more than 17.3 million shares moved hands compared to just 1.4 million on average (read: Biotech Regain Health: ETFs to Prescribe).
 
The news also bolstered biotech ETFs, especially the ones that focus on small caps. In particular, ALPS Medical Breakthroughs ETF (SBIO) was the biggest winner from the news, rising 5.4% on the day, followed by 4.5% gains for SPDR S&P Biotech ETF (XBI). Both funds have a Zacks ETF Rank of 3 or ‘Hold’ rating.

SBIO in Focus

This fund targets companies with one or more drugs in Phase II or Phase III FDA clinical trials by tracking the Poliwogg Medical Breakthroughs Index. It is a small cap centric fund, having amassed $114.9 million in its asset base. The product holds 95 stocks in its basket with Anacor taking the top spot at 5.1%. It charges 50 bps in fees per year from investors and trades in average daily volume of around 86,000 shares.

XBI in Focus

This fund tracks the S&P Biotechnology Select Industry Index and provides equal weight exposure across 90 stocks, suggesting no concentration issue and huge diversification benefits. The product has a definite tilt toward small cap securities, as mid and large caps account for a combined 31% share. ANAC occupies the twelfth position in the fund’s basket with 2% of the total assets. With AUM of $1.7 billion and average daily volume of 6.5 million shares, XBI is extremely liquid and an easily traded fund. It charges a relatively low fee of 35 bps a year for the exposure (see: all the Healthcare ETFs here).
 
Bottom Line
 
Investors should note that these two ETFs clearly outpaced the other products in the biotech space in the last trading session. This is especially true as the other popular names in the biotech space such as iShares Nasdaq Biotechnology ETF (IBB), First Trust NYSE Arca Biotechnology Index Fund (FBT), Market Vectors Biotech ETF (BBH) and PowerShares Dynamic Biotechnology & Genome Portfolio (PBE) added 3.1%, 2.8%, 1.9% and 2.2%, respectively, on the day. This is because these products have little or no exposure to Anacor Pharmaceuticals.
 
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PFIZER INC (PFE): Free Stock Analysis Report
 
ANACOR PHARMACT (ANAC): Free Stock Analysis Report
 
ALLERGAN PLC (AGN): Free Stock Analysis Report
 
ALPS-MED BRKTH (SBIO): ETF Research Reports
 
SPDR-SP BIOTECH (XBI): ETF Research Reports
 
ISHARES NDQ BIO (IBB): ETF Research Reports
 
FT-AMEX BIOTEC (FBT): ETF Research Reports
 
VANECK-BIOTECH (BBH): ETF Research Reports
 
PWRSH-DYN BIO (PBE): ETF Research Reports
 
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