Just What The Doctor Ordered: 4 ETFs For Biotech M&A

January 9, 2012 3:49 pm
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Apparently, buying companies that make Hepatits C treatments is in vogue these days. With the news that Bristol-Myers Squibb (NYSE: BMY) will acquire Inibitex (Nasdaq: INHX) for $2.5 billion, there are just two Hepatitis C treatment makers left to be acquired, Achillion Pharma (NASDAQ: ACHN) and Idenix Pharma (NASDAQ: IDIX).

That doesn’t mean there aren’t other biotech takeover targets. Quite the contrary. The biotech sector has a history of providing traders with plenty of acquisition candidates, rumors and actual deals. Maybe that’s why all of the major biotech ETFs are up today.

But with biotech ETFs pickings are slim, meaning there aren’t nearly as many funds tracking this sector as there are for groups such as energy or tech. Add to that, many biotech firms are heavy on the usual suspects such as Amgen (Nasdaq: AMGN), Biogen (Nasdaq: BIIB), Celgene (Nasdaq: CELG) and Gilead (Nasdaq: GILD).

Still, there are some worth evaluating as plays for M&A activity in the biotech sector.

Market Vectors Biotech ETF (NYSE: BBH)
This is one of the six old HOLDRs funds Market Vectors recently added to its lineup and it’s definitely a way to play the potential buyers as Amgen, Gilead, Celgene and Biogen account for over 45% of the ETF’s weight. Other BBH top-10 holdings include Alexion Pharmaceuticals (Nasdaq: ALXN), Regeneron (Nasdaq: REGN) and BioMarin (Nasdaq: BMRN) and all three of those stocks have been previously mentioned as possible takeover targets.

First Trust NYSE Arca Biotech Index Fund (NYSE: FBT)
The First Trust NYSE Arca Biotech Index Fund has over $190 million in assets under management and it allocates over 21% of its weight to biotech’s big four. That said, FBT is one avenue for playing a rebound in embattled Dendreon (Nasdaq: DNDN) and the ETF is home to possible acquisition candidates Alexion, Affymetrix (Nasdaq: AFFX) and InterMune (Nasdaq: ITMN).

FBT’s chart is starting to improve and the ETF would be even more attractive on a move above $38. That could clear the way for a run back to $45 or beyond.

With over $428 million in AUM, the SPDR S&P Biotech ETF isn’t going to get lost in the shuffle, but there are more advantages to this ETF than just size. Compared to BBH and FBT, the SPDR S&P Biotech ETF devotes a relatively small percentage of its weight to biotech’s big quartet. That opens up more room in the ETF for credible acquisition candidates. While slight, XBI does offer some exposure to Idenix. Beyond that, there are at least five other credible takeover targets in this ETF.

PowerShares S&P SmallCap Health Care ETF (Nasdaq: PSCH)
The PowerShares S&P SmallCap Health Care ETF may not even be mentioned in all the biotech ETF takeover talk and that’s odd. The ETF has over $104 million in AUM . More importantly, it’s home to 66 small-caps and even when an investor strips out the non-biotech stocks in this ETF, he’s left with a double-digit number of legitimate buyout candidates. PSCH is up over 13% in the past year and is a buy as long as support at $31 holds.

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