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Biotech ETF Industry Outlook For Second Half 2017

Biotech stocks have had a strong run so far in 2017 with the Nasdaq Biotechnology Index soaring 19.4% year-to-date (YTD). This is in sharp contrast to last year’s performance when the Index was down 19.1%. There were several reasons for the sector’s dismal performance last year foremost being the drug pricing controversy.

Apart from drug pricing, there were several other factors that impacted the sector -- 2016 was disappointing from an R&D perspective with a fewer number of drugs managing to gain FDA approval. There were some high-profile pipeline failures as well. Other factors that weighed on the sector include mixed results, slower-than-expected new product launches and increasing competition. (Read: Forget Big Tech; Biotech ETFs are Soaring Higher)

Recovery on the Cards

With the biotech sector performing well this year, it looks like the sector is set for a recovery. New product sales ramp up, R&D success and innovation, strong results, a higher number of FDA approvals and continued strong performance from legacy products are some of the factors that could contribute to a sustained recovery in the sector. Tax reforms and cash repatriation would support a recovery as well.

Importantly, investors now seem to be more comfortable with the drug pricing scenario and are willing to look at the fundamentals of the sector. Expectations are that steps taken by the Trump administration to drive down drug prices will not be as draconian as previously expected.(Read: 5 Reasons Why Biotech ETFs are Surging)

Deregulation and increased competition seem to be some of the ways that will be used to control drug prices. The FDA is working on a plan to lower healthcare costs by speeding up the development of next-generation treatments, especially for rare diseases or targeted cancer therapies.

Biosimilars Pose a Threat

Although biosimilars are yet to pick pace, they remain a major threat for biotech stocks specially companies that are set to lose patent protection for major blockbuster drugs in the next few years. While a relatively new area, the market for biosimilars is huge and highly lucrative with several blockbuster biologics including Humira and Lantus slated to lose patent protection by 2020. Biosimilars are expected to reduce healthcare costs and provide a large number of patients with access to much needed biologic treatments. Biosimilars are also gaining acceptance across formularies.

M&As to Pick Pace in 2H17?

Expectations are...