Why Health Care Is Trouncing the Dow

After Friday's surge lifted the Dow Jones Industrial Average (INDEX: ^DJI) and S&P 500 into positive territory for the week, hopes were dashed this morning that the momentum could be maintained. Although no major macro news is pulling the markets south, all three major indexes are in negative territory.

Despite all that, the health care sector saw two major buyouts today, and investors are getting set for a potential blockbuster drug approval tomorrow along with second-quarter earnings from an industry stalwart.

Let's take see how the three major indexes are faring and take a closer look at why the health care sector is trouncing the broader market.

Source: Yahoo! Finance as of 2:30 p.m.

Par Pharmaceuticals (NYSE: PRX) is soaring 36% after agreeing to be taken private by TPG Capital. Par is welcome to seek a better deal until Aug. 24, but I'm reluctant to think Par investors will do much better. The company has a small proprietary products division, but the majority of revenue comes from the generic business, which is a low-margin proposition. Although the patent cliff will be a boon for generic drug companies, will Par add economies of scale for a larger player to be attractive? Call me skeptical.

In other deal-making news, GlaxoSmithKline is up slightly despite acquiring Human Genome Sciences (Nasdaq: HGSI) for a sweetened $14.25 per share offer, up from $13. HGS was looking to get a bidding war going, but its close ties with Glaxo limited interest from other big pharma players. Not only do the companies share lupus drug Benlysta, but also late-stage drugs for cardiovascular disease and type 2 diabetes. To date Benlysta has been a disappointment, but perhaps Glaxo's muscle can help develop it to its potential. Even with the raised offer, plenty of HGS investors are closing out as much as 50% down, and the market thinks Glaxo smartly jumped on a potentially underpriced asset.

VIVUS (Nasdaq: VVUS) is up 7% ahead of its date with destiny tomorrow. It should hear back, after a three-month delay, whether obesity drug Qnexa is approved. Almost more important than approval, since most expect it after a 20-2 advisory panel recommendation, is labeling. Given that Qnexa causes birth defects, how restrictive will the FDA be regarding women of childbearing age? Will doctors only have to avoid women planning to become pregnant, will women on Qnexa be required to take monthly pregnancy tests, or will the population be cut out entirely? These are the questions on investors' minds heading in to tomorrow's big decision.

Dow component Johnson & Johnson (NYSE: JNJ) is flat ahead of tomorrow's second-quarter results. Analysts are expecting $1.29 per share and J&J has topped estimates the last four quarters, but this isn't a stock investors should be worried about quarter to quarter. With its 3.6% yield, strong drug pipeline, and dominant force in medical devices, Johnson & Johnson is well positioned to benefit from both emerging economies' newfound wealth and the aging population in the developed world.

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