With Trump winning the U.S. presidential election, the biotech and pharma sectors have regained their lost ground. Since Clinton - who has long been vocal against the price gouging issue in the pharma sector - is no more threat to the sector, pharma and biotech stocks should get a break from controversies, at least for some time.
As a result, biotech ETFs soared in the last five trading sessions (as of November 10, 2016), returning in the range of 15.8-26%.
An end to the price gouging issue is perhaps the key driver of the latest biotech rally. However, four other factors elaborated below may also have been instrumental in setting biotech and pharma stocks northbound for the days to come.
The sector, which has long been investors' favorite and saw an enormous run from late 2011 till summer 2015, has lost its luster from the year-to-date look. The risk-off sentiments prevalent in the early part of 2016 hit this high-beta, high-growth area. As a result, despite rebounding massively in recent times, the biotech exchange-traded fund SPDR Biotech ETF (NYSEARCA:XBI) is off about 6% this year (as of November 10, 2016).
Investors should also note that such a steep sell-off brought down the once-sizzling hot biotech space to a calmer valuation. XBI has a P/E ratio of 16.56 times versus the SPDR S&P 500 Trust ETF's (NYSEARCA:SPY) P/E of 17.73.
Same was the case for pharma ETFs, which are off 7.8-18% so far this year. But the SPDR S&P Pharmaceuticals ETF (NYSEARCA:XPH) has a P/E of 12.92 times, though other pharma ETFs are still richly valued. If we look at the overall medical sector, the P/E ratio of the S&P 500 stands at 18.8 times for next year, while the medical sector's is at 15.4 times, as per the Earnings Trends issued on November 9, 2016.
Now it's time to look at the earnings picture. The medical sector has logged 6.3% earnings growth in Q3 on 7.3% higher revenues. Notably, so far, revenue growth is the second highest in the 16 major sectors classified under the S&P 500 index.
Lower Corporate Taxes in the Cards?
As per an article published on Barrons, corporate tax reform and cash access may facilitate biotech stocks and ETFs ahead. In his campaign, Trump indicated that he will reduce corporate tax to 15% and provide a one-time repatriation holiday of 10%. This lower tax rate would do wonders for big biotech companies like Biogen (NASDAQ:BIIB), which can see EPS rising by about 10%, as per the article.
Smaller-cap biotech firms would be especially benefited, as they are so cash-strapped that their present cash holdings can fund just 11 months of research, as per Reuters.
Wave of Mergers & Acquisitions
This newfound source of cash would help several biotech companies to indulge in merger & acquisition activities. In any case, the space is known for inorganic growth. Although Allergan Plc (NYSE:AGN) announced back-to-back takeover deals in late September and Pfizer Inc. (NYSE:PFE) announced its $14 billion acquisition of cancer drugmaker Medivation in August, deals have cooled down (off 65% year over year) in the sector lately.
Healthcare investors see "renewed interest in some prime targets of takeover speculation, from cancer drug specialists like Tesaro (NASDAQ:TSRO) to rare diseases firms like Sarepta Therapeutics (NASDAQ:SRPT)." Moreover, the sector's valuation is subdued at present, opening the door for acquisitions at cheaper prices.
ETFs to Buy
We suggest buying low P/E biotech ETFs at this moment to make the most of the election-induced surge.
SPDR Biotech ETF - P/E 16.56 times
BioShares Biotechnology Products ETF (NASDAQ:BBP) - P/E 18.03 times
VanEck Vectors Biotech ETF (NYSEARCA:BBH) - P/E 18.08 times
ALPS Medical Breakthroughs ETF (NYSEARCA:SBIO) - P/E 19.36 times
First Trust NYSE Arca Biotechnology Index ETF (NYSEARCA:FBT) - P/E 19.99 times