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What Lies Ahead for Biotech ETFs?

The biotech sector has had a rough start to the year with the NASDAQ Biotechnology Index declining 17.5% year-to-date. Compare this to the spectacular performance over the last few years and one wonders whether the dream run for the sector is over.
 
Biotech stocks have been under immense pressure since Sep 2015 due to sector-specific issues like increasing political and media focus on high price tags for new drugs and the changing competitive scenario as well as other factors like oil prices, global terrorism and China.
 
Pricing Concerns
 
Both pharma and biotech companies are under a lot of pressure regarding the high price tags for new drugs. Democratic presidential frontrunner Hillary Clinton’s “price gouging” tweet triggered a slide in healthcare stocks in Sep 2015. Since then, the issue has been gaining focus and is not likely to die down easily -- while presidential candidates may have differing opinions about other matters, all are pretty much on the same page where the high prices of drugs are concerned. Proposed health care plans include suggestions on how to rein in the prices of new drugs. (Read: Biotech Regains Health—ETFs to Prescribe)
 
Biosimilar Competition: A New Challenge
 
Last year, the FDA approved the first biosimilar in the U.S. – Sandoz’s Zarxio – a biosimilar of Amgen’s Neupogen. The approval is a landmark decision and follows years of debate regarding the regulatory path for biosimilars. Unlike their pharma counterparts, biotech companies have not been exposed to generic competition in the U.S. But with the approval of Zarxio, the floodgates have opened.
 
Several companies are currently working on bringing in biosimilar versions of multi-billion dollar revenue-generating products like Enbrel and Humira among others.
 
Deals to Continue
 
Licensing agreements and deals including those with opt-in arrangements should continue being signed this year with immuno-oncology remaining a favorite area. Moreover, with valuations approaching reasonable levels, we could see several merger and acquisition agreements being announced as the year progresses. Quite a few of the major biotech companies are rumored to be on the look-out for suitable deals. (Read: 5 Sector ETFs to Play Now)
 
New Products Should Gain Traction
 
Highly-awaited new products that gained approval last year should contribute significantly to revenues. Some of the important new product approvals include cystic fibrosis treatment, Orkambi, heart failure treatment, Corlanor, PCSK9 inhibitors –Repatha and Praluent, and Genvoya (HIV).
 
While 45 new molecular entities (NMEs) and Biologics License Applications (BLAs) were approved by the FDA last year, so far in 2016, the FDA has approved 5 NMEs and BLAs and has expanded the label of cancer drugs like Kyprolis and Imbruvica. (Read: Will Volatility ETFs Rule in May?)
 
 
 
ETFs in Focus
 
Highlighted below are some biotech ETFs - ETFs present a low-cost and convenient way to get a diversified exposure to the sector.
 
iShares Nasdaq Biotechnology ETF (IBB)
 
IBB, launched in Feb 2001 by BlackRock Investments LLC, tracks the Nasdaq Biotechnology Index. The fund mainly covers biotech stocks (77.9%) with pharma accounting for 14.5%, life sciences tools & services for 7.5% and Health care supplies for 0.11%. The top 3 holdings include Amgen Inc. (8.24%), Gilead Sciences Inc. (8.20%) and Regeneron Pharmaceuticals, Inc. (7.71%). The total assets of the fund as of Apr 4, 2016 were $6.72 billion representing 189 holdings. The fund’s expense ratio is 0.48% while dividend yield is 0.09%. The trading volume is roughly 2,950,216 shares per day.
 
SPDR S&P Biotech ETF (XBI)
 
XBI, launched in Jan 2006 by State Street Global Advisors., tracks the S&P Biotechnology Select Industry Index. The fund primarily covers biotech stocks (99.9%). The top 3 holdings include ACADIA Pharmaceuticals Inc. (2.67%), Medivation, Inc. (2.23%), and Neurocrine Biosciences Inc. (2.20%). The total assets of the fund as of Apr 1, 2016 were $1.9 billion representing 90 holdings. The fund’s expense ratio is 0.35% while dividend yield is 0.76%. The trading volume is roughly 9,231,887 shares per day.
 
First Trust NYSE Arca Biotechnology Index Fund (FBT)
 
FBT, launched in Jun 2006 by First Trust Advisors, tracks the NYSE Arca Biotechnology Index. The top 3 holdings include Medivation, Inc. (4.04%), Bio-Techne Corp. (3.97%), and Juno Therapeutics Inc. (3.95%). The fund’s expense ratio is 0.58% while dividend yield is 0.09%. The trading volume is roughly 159,227 shares per day.
 
Market Vectors Biotech ETF (BBH)
 
BBH, launched in Dec 2011 by Van Eck, tracks the Market Vectors US Listed Biotech 25 Index. The fund covers health care stocks. The fund’s expense ratio is 0.35% while dividend yield is 0.32%. The trading volume is roughly 180,238 shares per day.
 
PowerShares Dynamic Biotechnology & Genome Portfolio – GENOME (PBE)
 
PBE, launched in Jun 2005 by Invesco PowerShares, tracks the Dynamic Biotech & Genome Intellidex Index. The top 3 holdings include Gilead Sciences Inc. (4.97%), BioMarin Pharmaceutical Inc. (4.90%), and Alexion Pharmaceuticals Inc. (4.88%). The total assets of the fund as of Apr 4, 2016 were $270.1 million representing 31 holdings. The fund’s expense ratio is 0.57% while dividend yield is 1.45%. The trading volume is roughly 36,651 shares per day.
 
Conclusion:
 
High risk and high returns -- this is a term that is often associated with the biotech sector. Biotech drugs, which are developed through a biological process/system or by using living organisms, require a lot of investment. The drugs are complex in nature and take several years to develop. Companies which hit the bull’s eye become overnight success stories with shares even doubling or tripling on positive news. However, negative outcomes have an equally strong effect on the shares and failure may very well spell doom for these companies.
 
Strong pipelines, innovative treatments, impressive results, growing demand for drugs especially for rare-to-treat diseases, an aging population and increased health care spending should support growth in this sector.
 
On the flip side, the high cost of treatments, pricing controversies and the threat of biosimilars remain dampeners for this high risk-high return sector.
 
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ISHARES NDQ BIO (IBB): ETF Research Reports
 
SPDR-SP BIOTECH (XBI): 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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