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High risk and high returns -- this is a term that is often associated with the biotech sector. Biotech drugs, which are developed through a biological process/system or by using living organisms, require a lot of investment. The drugs are complex in nature and take several years to develop.

Companies which hit the bull’s eye become overnight success stories with shares even doubling or tripling on positive news. However, negative outcomes have an equally strong effect on the shares and failure may very well spell doom for these companies. (See: Pharma ETFs—A Safe Haven from the Biotech Stock Slump?)
 
Biotech companies have always attracted a lot of interest especially from their pharma counterparts who are looking to boost their pipelines. The sector has seen several mergers and acquisitions (M&A), collaborations and licensing activities over the last couple of years.

Many pharma companies are focusing on in-licensing mid-to-late stage pipeline candidates that look promising, instead of developing a product from scratch, which involves a lot of funds and time.
 
Small biotech companies are open to licensing activities and collaborations. Most of these companies find it challenging to raise cash, thereby making it difficult for them to survive and continue with the development of promising pipeline candidates. Therefore, it makes sense for them to seek deals with pharma companies that are sitting on huge piles of cash.

Biotech stocks that have attractive pipeline candidates or technology that can be used for the development of novel therapeutics are much in demand. Therapeutic areas which could see a lot of licensing activity include immuno-oncology, oncology, central nervous system disorders, diabetes and immunology/inflammation. The hepatitis C virus (HCV) market is also attracting a lot of attention.
 
Quite a few companies are also entering into deals for the development of biosimilars, generic versions of biologics. Companies like Amgen and Biogen are all targeting the highly lucrative biosimilars market. (Read: Volatility ETFs signaling further volatility?)
 
The biotech sector has had an incredibly good run over the last two years. However, since late Mar 2014, a major selloff was triggered with lawmakers questioning the pricing of Gilead’s hepatitis C virus treatment, Sovaldi. Since then, the NYSE ARCA Biotech Index fell 13.6% and NASDAQ Biotechnology is down 13.2%.
 
Although investors may remain jittery about the ongoing choppiness, fundamentals remain attractive. Strong pipelines, innovative treatments and impressive results should help the sector rally from the recent doldrums. The price correction, in fact, provides a good opportunity to invest in the following ETFs.  (See all healthcare ETFs here)
 
iShares Nasdaq Biotechnology ETF (IBB - ETF report)
 
IBB, launched in Feb 2001 by BlackRock Investments LLC, tracks the Nasdaq Biotechnology Index. The fund mainly covers biotech stocks (77.3%) with pharma accounting for the balance (22.7%). The top 3 holdings include Amgen (8.48%), Gilead (8.42%) and Celgene (8.34%). The total assets of the fund as of Apr 28, 2014 were $4.4 billion representing 122 holdings. The fund’s expense ratio is 0.48% while dividend yield is 0.03%. The trading volume is roughly 3,429,793 shares per day.
  
SPDR S&P Biotech ETF (XBI - ETF report)
 
XBI, launched in Jan 2006 by State Street Global Advisors., tracks the S&P Biotechnology Select Industry Index. The fund covers only biotech stocks. The top 3 holdings include Sarepta Therapeutics (2.11%), Myriad Genetics (1.73%) and MannKind Corporation (1.72%). The total assets of the fund as of Apr 25, 2014 were $1.01 billion representing 84 holdings. The fund’s expense ratio is 0.35% while dividend yield is 0.41%. The trading volume is roughly 1,325,237 shares per day.
 
First Trust NYSE Arca Biotechnology Index Fund (FBT - ETF report)
 
FBT, launched in Jun 2006 by First Trust Advisors, tracks the NYSE Arca Biotechnology Index. The top 3 holdings include InterMune (5.45%), Gilead (5.35%) and Techne Corporation (5.34%). The total assets of the fund as of Apr 25, 2014 were $1.05 billion representing 20 holdings. The fund’s expense ratio is 0.60% while dividend yield is 0.00%. The trading volume is roughly 362,260 shares per day.
 
Market Vectors Biotech ETF (BBH - ETF report)
 
BBH, launched in Dec 2011 by Van Eck, tracks the Market Vectors US Listed Biotech 25 Index. The fund covers health care stocks. The top 3 holdings include Gilead (13.45%), Amgen (11.11%) and Celgene (8.97%). The total assets of the fund as of Apr 28, 2014 were $479.0 million representing 26 holdings. The fund’s expense ratio is 0.35% while dividend yield is 0.00%. The trading volume is roughly 447,158 shares per day.
 
PowerShares Dynamic Biotechnology & Genome Portfolio – GENOME (PBE - ETF report)
 
PBE, launched in Jun 2005 by Invesco PowerShares, tracks the Dynamic Biotech & Genome Intellidex Index. The fund covers biotech (66.54%), life sciences tools & services (18.96%), specialty chemicals (5.87%), health care supplies (3.07%), pharma (2.79%) and electronic equipment and instrument (2.77%) stocks. The top 3 holdings include Sigma-Aldrich Corporation (5.87%), Amgen (5.24%) and Gilead (5.21%).

The total assets of the fund as of Apr 28, 2014 were $347.5 million representing 30 holdings. The fund’s expense ratio is 0.63% while dividend yield is 0.00%. The trading volume is roughly 76,443 shares per day.
 
Conclusion:
 
The bottom line is that even though the recent slide in share prices may continue in the near term that does not mean that the biotech sector should be avoided. Catalysts remain in the form of regulatory events and pipeline updates.

There have been quite a few strong product launches over the past few years including Tecfidera, Pomalyst, Soliris, Imbruvica, Sovaldi and Eylea. Growing demand for drugs especially for rare-to-treat diseases, an aging population and increased health care spending should support growth in this sector.
 
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