For Immediate Release
Chicago, IL – April 07, 2016 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Allergan (AGN), Pfizer (PFE), Health Care Select Sector SPDR Fund (XLV), iShares U.S. Healthcare ETF (IYH) and Vanguard Health Care ETF (VHT).
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Here are highlights from Wednesday’s Analyst Blog:
New Tax Inversion Rules: Threats to Healthcare ETFs?
The going has been tough for the healthcare space has this year following the slide in biotechnology stocks. The pain seems to have aggravated since the U.S. Treasury Department and Internal Revenue Service imposed tougher rules to curb ‘tax inversion’ deals. This is especially true as the Treasury levied a three-year limit on foreign companies bulking up U.S. assets to avoid ownership limits for a later inversion deal.
This means that the new rules would restrict the U.S. companies to participate in inversion transactions if they have already done so within the past three years. Additionally, the Treasury also proposed rules against the practice known as earnings stripping often undertaken following an inversion. In this regard, the new rules would curb related-party debt for U.S. subsidiaries in transactions that do not finance new investments in the United States (read: Trump Healthcare Reforms: Will ETFs Gain Health or Suffer? ).
A Near-Term Blow?
Tax inversion deals have been extremely popular among the drug companies and medical device makers, and were one of the major drivers of the healthcare space in the past few years. In tax inversion, U.S. companies acquire foreign companies to relocate their headquarters offshore in order to reduce or avoid tax bills. Notably, the U.S. has a higher corporate tax rate of 35% while other countries like the U.K. and Ireland have lower rates of 20% and 12%, respectively.
The new rules dealt a huge blow to the proposed $160 billion Allergan (AGN) takeover deal by the largest U.S. drug maker Pfizer (PFE) announced last November. This is because Allergan has been involved in several mergers within the past 36 months. As a result, the planned merger, expected to close in the second half of this year, has been terminated and Pfizer will pay Allergan $150 million as reimbursement of expenses associated with the transaction.
However, this is not the first time that inversion rules have unraveled the mergers and acquisitions in the space. Though the new rules will slow down the pace of inversion transactions, the companies will continue to seek new and creative ways to relocate their tax residence to avoid paying taxes at home, as per the Treasury Secretary Jacob J. Lew (read: Merger & Acquisition ETFs: Will 2016 Replicate 2015? ).
As such, the move is likely to have a near-term impact on the healthcare ETFs but the long term still looks bright given encouraging industry trends including promising new drugs, growing demand in emerging markets, an aging population, ever-increasing healthcare spending and Obamacare. Investors could take advantage of the beaten down prices and load up healthcare ETFs in their portfolio for the coming months.
These funds provide substantial exposure to pharmaceutical stocks and have a solid Zacks ETF Rank of 1 or 'Strong Buy' rating:
Health Care Select Sector SPDR Fund (XLV)
The most popular healthcare ETF follows the Health Care Select Sector Index. This large cap centric fund manages about $12 billion in its asset base and trades in heavy volume of around 14.2 million shares. Expense ratio came in at 0.14%. In total, the fund holds 60 securities in its basket with Johnson & Johnson taking the top spot at 11.3% while the other firms hold no more than 7.04% of assets. Pharma accounts for 38.1% share from a sector look while biotech, healthcare providers and services, and equipment and supplies make up for a double-digit exposure each.