2 Key Drivers Behind Biotech ETF Rally

Biotech ETFs have been on fire in recent days, and that has nothing to do with the ongoing debate surrounding the health care bill. Instead, it’s about regulation—or the easing of regulation, that is.

The two main drivers of this recent rally both center on a positive regulatory backdrop—one that’s offering fundamental support to the segment as well as fueling upside in some breakthrough biotech companies.

Paul Yook, founder of BioShares, which is behind a pair of biotech ETFs, said that President Trump’s recent actions are alleviating what had been significant investor concern about the possibility of government intervention in drug pricing.

Pharma Friendly

Following the presidential election, biotech stocks soared on the hopes of a hands-off pharma-friendly administration, but investors soon got “spooked” by talk of government efforts to bring drug prices down, Yook says. That has now changed.

“Trump said that the way to bring down drug prices is to allow the industry to self-regulate,” he said, highlighting a New York Times article last week detailing the administration’s plan to ease regulations. “That was a big positive for pharma and biotech companies.”

The other key driver has been Trump’s goal of easing FDA regulation as well, which would open the way for many breakthrough companies to finally get their first drugs approved. One such company, Portola Pharmaceuticals, recently received approval for its anticoagulant drug—something that, according to Yook, the industry was 50/50 on whether it would ever happen.

‘Friendlier’ FDA?

Portola’s win not only pushed the company’s up more than 100% year-to-date, but it also sparked enthusiasm that the biotech industry may have a “friendlier” FDA behind it. Portola is only one of the names that have delivered star performances in 2017. There are other biotech firms that have doubled or more than doubled this year.

Many of these names are found in some of the best performing biotech ETFs this year (excluding leverage and inverse strategies), such as the SPDR S&P Biotech ETF (XBI), one of the segment’s asset leaders, which is up 31% (it owns Portola).

Also up that much is the BioShares Biotechnology Clinical Trials Fund (BBC), which invests in early-stage biotech stocks that are still in clinical trials. Companies included are again Portola, and Cara Therapeutics, which is on the verge of bringing to market a new painkiller touted to be less addictive than traditional opioids.

The BioShares Biotechnology Products Fund (BBP), BioShares’ other biotech ETF, and one that invests in less volatile biotech companies that already have FDA-approved drugs, is up more than 20% year-to-date. The iShares Nasdaq Biotechnology ETF (IBB)—the segment’s largest ETF—is up 17% so far this year. 

Chart courtesy of StockCharts.com

What’s Underneath

IBB only invests in companies that are listed on the Nasdaq, regardless of how attractive or cutting-edge a company may be outside the Nasdaq board. The fund is massive, with $10 billion in assets despite its pricier 0.47% expense ratio than competing XBI, which offers more pure-play exposure.

XBI bypasses a lot of pharmaceutical names for true biotech companies and equal-weights its holdings. The fund has nearly $4 billion in total assets, with an expense ratio of 0.35%.

Both BBC and BBP, which are much smaller and newer funds, with $25 million and $40 million in assets, respectively, are equal-weighted as well. BBC focuses on the up-and-coming breakthrough companies still in clinical trials, and BBP focuses on more established names. Both funds have an expense ratio of 0.85%, or $85 per $10,000 invested.

These ETFs are just a sampling of a segment comprising 17 funds today. Investors can pick and choose whether they want higher risk/reward exposure through funds that offer access to companies on the cutting edge of innovation, or less volatile routes via names that are well-established drugmakers.

Either way, as Yook says, the fundamental backdrop—at least for now—looks positive, as price reform is “off the table,” and a “friendly” FDA could be the new norm. Valuations, too, are relatively attractive compared to other sectors.

Contact Cinthia Murphy at [email protected]