S&P Bullish On Biotech ETFs (FBT, IBB, XBI)
Citing "enhanced prospects for new drug approvals and a favorable outlook for mergers and acquisitions," S&P Capital IQ extolled the virtues of investing in the biotechnology sector and highlighted several ETFs offering exposure to biotech stocks in a new research note.
Bolstered by new drug approvals and increased M&A activity and speculation, through May 11, the S&P Biotech Index increased 21.3%, versus a 7.8% gain for the S&P 1500 Composite Index, according to S&P Capital IQ. The bullishness permeating the biotech sector thus far in 2012 has sent the iShares Nasdaq Biotechnology ETF (Nasdaq: IBB) soaring by almost 25% year-to-date while the rival SPDR S&P Biotech ETF (NYSE: XBI) is up nearly 21%. Both funds earn Marketweight ratings from S&P.
The research firm applied an Overweight rating to the PowerShares Dynamic Pharmaceuticals Portfolio (NYSE: PJP), which is a mix of pure-play biotech names and traditional pharmaceuticals stocks. PJP's top-10 holdings include Gilead Sciences (Nasdaq: GILD) and Amgen (Nasdaq: AMGN) on the biotech side along with Abbott Labs (NYSE: ABT), Pfizer (NYSE: PFE) and Merck (NYSE: MRK), among others, on the blue chip pharmaceuticals side. On a year-to-date basis, the pharma exposure appears to be holding PJP back as that ETF is up just 11.1%.
PJP has $273 million in assets under management and of its 30 holdings, more than a third are pure-play biotech names. The The iShares Nasdaq Biotechnology Index Fund is home to $1.8 billion in AUM and almost 120 stocks, more than 40 of which qualify as pharma names. XBI, which has $576 million in AUM, is home to 48 stocks, all of which can be considered straight biotech plays.
"We see an improving trend for FDA first cycle review approvals, and a rise in the rate of new drug approvals for rare diseases. We think these trends are helping to boost investor sentiment toward the agency, after years of criticism stemming from its inconsistency in making and communicating its decisions. New drugs approved in 2011 included novel approaches to managing such diseases as auto-immune disorder lupus and chronic hepatitis C virus. In early 2012, FDA approved a new treatment for rare respiratory disease cystic fibrosis, months ahead of its scheduled action date. We are encouraged by the progress of additional treatments that we see having potential to further advance treatment options for hepatitis C and cystic fibrosis," S&P said in the note.
The one ETF that arguably offers the best mix of total returns coupled with exposure to new drug approvals and potential takeover targets is the First Trust NYSE Arca Biotech Index (NYSE: FBT), which was not mentioned in the S&P note. With $261.2 million in AUM FBT is smaller than IBB and XBI, but the fund's composition is arguably superior regarding allocations to takeover candidates.
"We anticipate that a favorable climate for M&A transactions involving biotech companies will continue, and note several recent and ongoing attempts by large pharmaceutical companies to acquire biotech companies. We see these larger firms needing to offset billions of dollars in revenue recently lost or set to be lost over the coming years from expiring drug patents, which is referred to as a "patent cliff" in the pharmaceutical industry." S&P said.
M&A could be a catalyst that boosts FBT further this year, but for now, the fund has sharply outperformed its larger rivals, surging 38% year-to-date. Home to 20 stocks, some FBT's top-10 holdings include Vertex Pharmaceuticals (Nasdaq: VRTX), Incyte (Nasdaq: INCY), Affymetrix (Nasdaq: AFFY) and Amylin Pharmaceuticals (Nasdaq: AMLN).
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