Why is the biotechnology sector still strong?
Despite all the gloom and doom in the markets over the past 60 days the biotechnology sector has barely flinched and is currently at YTD highs. Bellwether ETFs IBB (126) and XBI ($82.85) are up over 20% YTD after a brief correction in mid-April compared to the S&P which has sold off 6% since April 1 and is up only 6.6% YTD. Over the past five days alone the XBI ETF is up 3.5% while the SPY is down 1.42%. The FBT ($45.12) First Trust Arca Biotechnology Index Fund is up 38% YTD riding some big winners like Amylin (AMLN) Regeneron (REGN) and Vertex (VRTX). Recently Benziga published an article on biotech ETF's reiterating the underlying basis for strength in the sector: M&A and enhanced prospect for drug approvals.We recently urged caution in our biopharmaceutical portfolio because many of our top biopharmaceutical picks such as Alexion (ALXN), Biogen (BIIB) , and Regeneron have made huge moves YTD.
We wrote a detailed report , "Guide to Biotech Investing," on 5/27/11 in Investor Uprising that focused on underlying trends in the industry and major ETFs/ mutual funds. Let's review our conclusions and see if these conclusions hold up today:
From Investor Uprising Article:
"We've suggested some of the best biotech mutual funds and ETFs to add to portfolios for diversification and comparison. So why invest in biotech? In summary:
Because biotech can have a growth bent but doesn't always correlate with the macro economy, the sector can provide an interesting way to gain general technology exposure.
Life science ETFs track the PowerShares QQQ ETF (which holds all of the securities of the Nasdaq 100 Index) and complement the volatility of the tech sector. In the past five years, the QQQ returned 38%, while the iShares Nasdaq Biotechnology (IBB) returned 35%. In contrast, the S&P was up only 1%.
Biotechnology or life science ETFs track the sector well and are good investment vehicles to add to a wider-ranging healthcare investment portfolio. Although, again, past performance is never a guarantee of future results, the sector has done well the past five years, in spite of the recession.
Biotech and life science stocks have outperformed the S&P because of scientific breakthroughs, mergers and acquisitions, and FDA approval of new therapeutic categories, especially cancer.
Biotech is generally less sensitive to the economy than other sectors, and ETFs bring diversification and comparison to portfolios. Given the potential for solid long-term returns and the opportunity to counter-balance more economically sensitive stocks, individuals should give strong consideration to adding biotechnology exposure to their investment portfolios."
Nothing has changed among these underlying trends and we can add a few more:
- Hedge funds and mutual funds are very active in biotech. Fidelity and Vanguard are bigger players than ever in biotech. For example Fidelity owns over 5M (up 3.75M for quarter) shares of Medivation (MDVN $87.57) shares are up 90% YTD to a $3B market cap as news of their cancer drug MDV3100 in February triggered the rally. Moreover large hedge funds that focus in the sector tend to be MO players and pile on a hot stock.
- As the European contagion grows and investors flee industrial and material stocks due to global economic concerns, the life science sector offers a refuge because of the defensive nature of healthcare coupled with the "food chain effect" of large cap pharma needing product.
- The industry has matured and mid and large cap biotech companies have more late stage clinical products. Large cap drug companies are restructuring as blockbuster patents expire and are on the hunt for acquisitions. With plenty of money around investors drive up prices of the publicly traded companies. At the same time, venture capital and angel investments have lagged over the past 7 years so there are far fewer companies.
With the American Society of Clinical Oncology Meeting coming up on June 1 look for another driver to the sector which is being played by those "in the know".
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.