Market Overview

Rebound For Big Biotech ETF Will Require Some Patience


On Monday, more than 120 exchange traded funds hit 52-week lows and nearly 10 of those funds were biotechnology ETFs. That group included the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB), the largest biotechnology ETF by assets.


IBB finished lower by nearly 3.2 percent yesterday. Although the ETF managed to close well off its low for the day, also its newly set 52-week low, it is still down 33.2 percent over the past six months. IBB's recent struggles and those of the broader biotech space could be signs that investors will need to be patient in waiting for a rebound.


As it pertains specifically to IBB, the ETF could be in for a rebound led by two of its top holdings, Celgene Corporation (NASDAQ: CELG) and Gilead Sciences, Inc. (NASDAQ: GILD). Celgene and Gilead are down 24.4 percent 26.8 percent, respectively, over the past six months. According to Barron's, those slumps may be presenting investors with buying opportunities in those names. 


Gilead's “share price might be too pessimistic. It implies a 50% decline in combined HIV and hep-C revenues over the next five years, according to RBC Capital Markets analyst Michael Yee. That seems unlikely, in part because insurers have been finicky about who is covered for the hep-C drugs, which has created pent-up demand. Gilead has beaten Wall Street’s earnings estimates by double-digit percentages in each of the past four quarters, suggesting analysts have an acute and chronic case of underestimating its performance,” reports Barron's.


Celgene and Gilead Sciences are IBB's third- and fourth-largest holdings, respectively, combining for nearly 17.8 percent of the ETF's weight. Biotech stocks are in the midst of an "epic" selloff, Evercore ISI Mark Schoenebaum told CNBC on Monday.


He also said that while sector Price-to-Earnings ratios are near bottom -- "typically a buying signal" -- there's a caveat. Biotechs have traded at these levels longer than Schoenebaum's seen in the past, giving credence to the possibility that prices remain depressed


Over the past month, three of the 13 worst-performing non-leveraged ETFs were biotech funds— a statistic that is made even more damning when considering January is usually a seasonally strong month for the biotech space.


Some investors are losing patience with IBB. At one point last week, the ETF's year-to-date inflows were over $87 million. That number has since dwindled to $12.3 million.


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