Bolstered by an accommodating Food & Drug Administration
and promising recent clinical results for drugs aimed at treating
conditions such as hepatitis C and multiple sclerosis,
biotechnology stocks and
have been stellar performers in 2013.
Recently, it was an announcement by Vertex (NASDAQ:
) that its cystic fibrosis drug Kalydeco and an experimental
treatment, VX-661, showed promising results in a mid-stage
that sent biotech ETFs soaring
. However, the environment for these funds has been favorable for
well over a year and some analysts see more upside ahead for the
"In 2012, the FDA approved 39 new therapies, compared with 30
in 2011, with several of these treatments approved months ahead
of their scheduled action dates," said S&P Capital IQ in a
new research note. "In our view, these trends have eased an
overhang stemming from the FDA's inconsistency in making timely
decisions over the prior few years. Notable approvals were seen
in rare respiratory disease cystic fibrosis and various cancers
including prostate cancer and multiple myeloma."
Mergers and acquisitions activity has slowed somewhat in the
sector, but some ETFs
are well-positioned to deliver for investors
should takeover action increase. Notably, S&P Capital IQ sees
favorable long-term trends on this front.
"We expect a favorable long-term M&A (mergers and
acquisitions) environment," said the research firm. "We see large
pharmaceutical firms working to offset lost revenues from
expiring drug patents and large biotechs aiming to bolster their
drug pipelines amid maturing products and several years of
declining industry R&D productivity trends. We see widening
adoption of biomarker research and genetic-targeted clinical
studies helping to shorten development times and bolster pipeline
In terms of individual stocks, S&P Capital IQ has
five-star ratings on Gilead Sciences (NASDAQ:
), one of biotech's Big Four, and NPS Pharmaceuticals (NASDAQ:
), which makes Gattex for the treatment of adult patients with
short bowel syndrome. The research firm as a three-star rating on
Biogen Idec (NASDAQ:
) and a four-star rating on Amgen (NASDAQ:
), two of the other members of the Big Four biotech stocks.
) is the other.
One ETF investors can use for broad biotech exposure is the
iShares Nasdaq Biotechnology Index Fund (NASDAQ:
), the largest biotech ETF by assets with over $3.1 billion.
Although, IBB is home to 119 stocks, the Big Four combine nearly
29 percent of the fund's weight. NPS Pharmaceuticals receives a
weight of 0.33 percent in IBB.
S&P rates IBB Marketweight. Large-cap biotech names have
been among the primary drivers of the sectors returns this year.
That fact is highlighted by the 32 percent year-to-date gain for
the Market Vectors Biotech ETF (NYSE:
), which is heavily allocated to the Big Four. That does not mean
these stocks are richly valued.
"The U.S. large cap biotech group recently traded at an
average P/E of about 23X our 2013 EPS estimate, representing a
P/E-to-growth ratio of 1.2X. This level, despite advancing from
around 1X over the past few years, is significantly lower than
the industry's historical levels, which is evidence of, in our
view, the maturation of the industry," said S&P.
BBH was not mentioned in the S&P note, but the PowerShares
Dynamic Pharmaceuticals Portfolio (NYSE:
) was. PJP's name belies its biotech exposure. In fact, Gilead
and Amgen are the ETF's two largest holdings and combine for over
11 percent of the fund's weight.
The $475.3 million fund mixes those stocks and other biotech
fare along with traditional pharmaceuticals names such as Johnson
& Johnson (NYSE:
) and Abbott (NYSE:
). PJP, which S&P also rates Marketweight, is up almost 19
percent this year.
"PJP has an Overweight score in Performance Analytics, with
Marketweight scores in Risk Considerations and in Cost Factors
compared with other ETFs in its asset class," according to
The SPDR S&P Biotech ETF (NYSE:
) was also mentioned in the note, but that ETF is not rated by
S&P. XBI, which uses an equal weight approach, is up 18.4
For more on ETFs, click
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