Biotech ETF Industry Outlook

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Includes: ABBV, AMGN, BBH, FBT, IBB, JNJ, PBE, PFE, XBI
by: Zacks Funds

The biotech sector has had a rough start to the year with the NASDAQ Biotechnology Index declining approximately 16% year-to-date. Sector-specific issues like increasing political and media focus on high price tags for new drugs and the changing competitive scenario have been weighing on biotech stocks over the last few quarters.

However, the sector's fundamentals remain strong and mergers and acquisitions (M&As), product approvals and positive data flow should act as catalysts.

Drug Pricing to Remain in Focus

With presidential candidates, policymakers, the media and the general public focusing on the high price tags for drugs, drug companies may find it a bit difficult to justify their high prices by citing the years and funds that go into bringing new treatments to market and the need to invest in R&D to bring additional treatments to market.

According to the Oct 2015 Kaiser Health Tracking poll, affordability of prescription drugs remains at the top of the public's priority list for the President and Congress - focus should be on ensuring the affordability of high-cost drugs to people who need them and taking steps to lower prescription drug prices.

In this scenario, the drug pricing issue is not likely to die down easily - at least not until elections are over. Proposed healthcare plans include suggestions on how to rein in the prices of new drugs.

Biosimilars Gaining Importance

With the FDA approval of the first biosimilar in the U.S. (Sandoz's Zarxio - a biosimilar of Amgen's (NASDAQ:AMGN) Neupogen) last year, this area is fast gaining importance with a lot of companies working on bringing biosimilars of blockbuster biologic treatments to market.

Pfizer (NYSE:PFE) and Celltrion's biosimilar version of Johnson & Johnson's (NYSE:JNJ) blockbuster drug Remicade gained FDA approval earlier this year while the agency is expected to decide on the approval status of Amgen's biosimilar version of AbbVie's (NYSE:ABBV) Humira in Sep 2016.

Deals to Continue

Licensing agreements and deals including those with opt-in arrangements should continue being signed 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. Meanwhile, small bolt-on acquisitions will continue.

New Products Should Gain Traction in 2H16

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).

Meanwhile, so far in 2016, the FDA has approved 16 new drugs including Epclusa (HCV) Ocaliva (rare, chronic liver disease), Zinbryta (multiple sclerosis), and Venclexta (chronic lymphocytic leukemia in patients with a specific chromosomal abnormality) among others. The FDA also expanded the label of cancer drugs like Kyprolis and Imbruvica.

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 (NASDAQ:IBB)

IBB, launched in Feb 2001 by BlackRock Investments LLC, tracks the Nasdaq Biotechnology Index. The fund mainly covers biotech stocks (79.6%) with pharma accounting for 12.6%, life sciences tools & services for 7.7% and healthcare supplies for 0.12%. The top 3 holdings include Amgen, Inc. (8.37%), Biogen, Inc. (NASDAQ:BIIB) (8.22%) and Celgene Corporation (NASDAQ:CELG) (8.09%). The total assets of the fund as of Aug 18, 2016, were $7.73 billion, representing 187 holdings. The fund's expense ratio is 0.47% while dividend yield is 0.12%. The trading volume is roughly 625,662 shares per day.

SPDR Biotech ETF (NYSEARCA: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 Ionis Pharmaceuticals, Inc. (NASDAQ:IONS) (3.48%), Biogen Inc. (2.81%), and Sarepta Therapeutics, Inc. (NASDAQ:SRPT) (2.77%). The total assets of the fund as of Aug 17, 2016, were $2.2 billion, representing 89 holdings. The fund's expense ratio is 0.35% while dividend yield is 0.48%. The trading volume is roughly 3,469,172 shares per day.

First Trust NYSE Arca Biotechnology Index ETF (NYSEARCA:FBT)

FBT, launched in Jun 2006 by First Trust Advisors, tracks the NYSE Arca Biotechnology Index. The top 3 holdings include Ionis Pharmaceuticals, Inc. (3.99%), Qiagen NV (NASDAQ:QGEN) (3.97%), and Biogen, Inc. (3.80%). The total assets of the fund as of Aug 17, 2016, were $867 million, representing 30 holdings. The fund's expense ratio is 0.55% while dividend yield is 0.02%. The trading volume is roughly 61,979 shares per day.

VanEck Vectors Biotech ETF (NYSEARCA:BBH)

BBH, launched in Dec 2011 by Van Eck, tracks the Market Vectors US Listed Biotech 25 Index. The fund covers healthcare stocks. The fund's expense ratio is 0.35% while dividend yield is 0.29%. The trading volume is roughly 30,490 shares per day.

PowerShares Dynamic Biotechnology & Genome Portfolio ETF (NYSE:PBE)

PBE, launched in Jun 2005 by Invesco PowerShares, tracks the Dynamic Biotech & Genome Intellidex Index. The top 3 holdings include Amgen, Inc. (5.32%), Biogen, Inc. (5.29%), and Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) (5.23%). The total assets of the fund as of Aug 18, 2016, were $266.4 million, representing 31 holdings. The fund's expense ratio is 0.57% while dividend yield is 1.06%. The trading volume is roughly 11,131 shares per day.

Conclusion

"High risk and high returns" is a term 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 healthcare 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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