An election year has added to the pressures that hit biotechnology stocks hard, but a look under the hood of two sibling biotech ETFs is revealing. It shows the more speculative companies in this extremely heterogeneous industry caused much of the hurt.
BioShares Biotechnology Products (BBP) is down 1.4% year to date through Oct. 20 and invests in established companies that have brought at least one drug to market.
The 35 stock holdings in this exchange traded fund include Biogen (BIIB), Amgen (AMGN), Celgene (CELG), Gilead Sciences (GILD) and Regeneron (REGN).
IBD’S TAKE: The largest, cap-weighted biotech ETFs stand to benefit most if these five top companies climb the “wall of worry” that has built around the industry.
BioShares Biotechnology Clinical Trials (BBC) is down 31.0% so far in 2016 and invests in young and smaller companies whose drugs are in the experimental-testing stage.
Its portfolio includes Sarepta Therapeutics (SRPT), whose shares rocketed in September after the FDA approved its drug to treat Duchenne muscular dystrophy. That approval means Sarepta will move to the BBP portfolio when the two BioShares ETFs next rebalance in December.
This ETF pair allows investors to decide “how much to mix,” in terms of combining more-risky with less-risky biotechs, said Paul Yook, founder of BioShares.
BBP’s focus on household names makes it a relatively less volatile fund. In contrast, BBC holds the riskiest biotechs — highflying companies whose shares could double or triple overnight, and may crash and burn just as well.
Yook describes BBP and BBC as the only exchange traded funds to separate clinical-trial companies and product companies into two distinct and stand-alone investments.
Investors don’t seem much enamored with the idea of custom-tailoring risk. The funds are extremely small and thinly traded, nearly two years after their debut. They have, however, seen a combined $5.8 million in net inflow over the first three quarters of 2016.
The BBP fund is the best performer among biotech ETFs so far this year, and BBC the worst.
Meanwhile, bellwether iShares Nasdaq Biotechnology (IBB) has given up 20.8% year to date and sits 21% below its December high.
Biotechnology ETFs crumbled over the past year, coming under pressure from lackluster earnings as well as negative scrutiny for health care peers Valeant Pharmaceuticals (VRX) and Mylan (MYL) in a politically charged season.
Despite the “wall of worry” around this industry group, at least one analyst has a favorable outlook for biotechs after the Nov. 8 presidential elections.
Yook points out another promising sign: a pickup in M&A, with mouthwatering sticker prices for target companies. Allergan (AGN) announced in September that it would acquire Vitae Pharmaceuticals (VTAE) for roughly $639 million — a 159% premium per share.
Biotechs are attractively priced too. This is one rare corner of the stock market where valuations are cheaper than they have been historically, Yook told IBD in a phone interview.
While many ETF investors are waiting to buy biotechnology stocks until after the November election, he believes the fear of a Hillary Clinton presidency is priced in.
The Democratic presidential contender’s remarks on drug price-gouging had triggered sharp biotech declines.
Yook added: “Most of the political scrutiny will be faced by specialty pharmaceutical companies such as Valeant, Mylan and Horizon (HZNP), which our BioShares funds avoid. “
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