Pharma, Biotech ETFs Should Benefit from Swine Flu Vaccine, Healthcare Politics

Drug distributors (pharmaceuticals) weathered the heart of the bear better than most areas. That’s not unusual for a defensive sub-segment of health care.

Drug developers (biotech) have a history of volatility due to the hit-or-miss nature of creating the next big “thing’ or developing a ”flop.” Still, biotech has risk reduction qualities as a diversifier in one’s portfolio, as biotech ETFs had the lowest correlation with the S&P 500 in the 2007-2009 bear.

It follows that very few unleveraged ETFs are able to claim 1-year gains; 4 to be exact. First Trust Amex Biotech (FBT) is one of them. Similarly, biotech ETFs and pharma ETFs collectively account for some of the best 1-year performers on the 1-year scoreboard.

1-Year Returns for Biotech ETFs and Pharma ETFs
					1-Year %
First Trust Amex Biotech (FBT)					9.74%
iShares DJ Pharmaceuticals (IHE)					-1.11%
SPDR Pharmaceuticals (XPH)					-2.10%
Pharmaceutical HOLDRS (PPH)					-4.72%
iShares Nasdaq Biotech (IBB)					-8.18%

The only issue that jumps out at the viewer is the discrepancy between the performance of the iShares vehicle, IBB, versus the performance of First Trust’s FBT. In brief, the iShares Nasdaq Biotech Fund (IBB) tracks a market-cap weighted Nasdaq index that is heavily swayed by 3 companies (i.e., Amgen, Gilead and Teva).

In contrast, the First Trust Amex Biotech Fund (FBT) tracks a NYSE equal-weighted biotech index and the fund is rebalanced quarterly. The equal weighting has been benficial. What’s more, when Human Genome Sciences (HGSI) catapulted 300% in a single July afternoon due to a lupus drug meeting expectations, we now have a temporary situation where HGSI accounts for 20% of the First Trust Amex Biotech Fund (FBT).

Can pharma and biotech get rolling in September-October? Aren’t we coming into flu season… and possibly, swine flu season? Isn’t the demand for a swine flu vaccine greater than the demand?

The World Health Organization said that the H1N1 swine flu should be approved and ready for use in September in some countries of the world. Leading vaccine makers in this area include Glaxo and Sanofi… giant global pharma companies. The Chinese company, Sinovac Biotech (SVA), claims that it has produced a safe swine flu vaccine, but it does not appear in either major biotech ETF.

One of the concerns a prospective investor may have about pharma or biotech is the White House’s proposed health care legislation. As new legislation may seek ways to directly lower costs, drug makers and drug distributors could find profits getting hammered.

Yet a backlash against pork barrel politics in a country that isn’t sure it wants a whole-scale, top-down “reorg” of the healthcare system may ultimately help pharma/biotech. More specifically, changes to health care may be more modest and “Big Pharma” has hedged against ill-will by buying numerous biotech start-ups.

Of course, there’s also venture capital. VC investments in biotechs surged 54% in the second quarter from the first quarter as reported by PriceWaterhouseCoopers LLP.

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.