ALPS today is rolling out on NYSE Arca a fund targeting smaller drug companies that have products in Phase II or Phase III U.S. FDA trials. The fund will likely compete with a recently launched ETF from newcomer BioShares.
The ALPS Medical Breakthroughs ETF (SBIO) tracks the adorably named Poliwogg Medical Breakthroughs Index. According to materials published by ALPS, the fund is designed to take advantage of consolidation in the pharmaceutical industry and the projected growth of biotechnology (as opposed to traditional chemically based drugs).
According to ALPS, larger pharmaceutical companies are seeing their patents expire on some of their best-selling drugs and, as a result, are buying smaller firms that have promising products in research and development. In addition, many of these firms have a biotechnology focus, and rather than developing drugs based on chemicals, they are instead focusing on treatments based on proteins, enzymes and microorganisms. ALPS cites expected growth figures of roughly 30 percent from 2011 levels by 2016 that would put global spending on “biologics” above $200 billion.
The Poliwogg Medical Breakthroughs Index has 75 components, all of them small- and midcap biotechnology and pharmaceutical companies with at least one drug in the Phase II or Phase III FDA clinical trials. That is generally the last several years of a drug’s development, which can take decades from start to finish. These are also the firms that ALPS notes are spending more on research and innovation than on marketing and distribution, which is what “big pharma” companies tend to do.
The index’s top five holdings include names like Receptos, NPS Pharmaceuticals, Seattle Genetics, Akorn and Pacira Pharmaceuticals, and the weighted average market cap of its components is just $2 billion. According to ALPS’ materials, the weighted average market cap for the Nasdaq Biotechnology Index components is $46.5 billion.
Although there are quite a few pharmaceutical and biotechnology ETFs trading, the closest competitor looks to be the BioShares Biotechnology Clinical Trials Fund (BBC), which launched earlier this month. The fund tracks an equal-weighted index that covers biotech companies with “lead drugs” in Phase I, II or III clinical trials. However, SBIO targets traditional pharmaceutical companies and biotech firms, and in focusing on firms with products in Phase II and III testing, it likely eliminates some of the less successful companies.
SBIO is also cheaper; it comes with an expense ratio of 0.50 percent versus BBC’s expense ratio of 0.85 percent. Meanwhile, the iShares Nasdaq Biotechnology ETF (IBB | A-25), which launched way back in 2001, is a $7 billion fund and comes with an expense ratio of 0.48 percent.