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The pharma and biotech industry is a victim of concerns over increased regulatory scrutiny on high drug prices over the past two years. The worries cooled down after Trump’s victory, and gave biotech stocks a shot in the arm. But the trend has reversed again following Trump's first press conference held yesterday (read: ETFs & Stocks That Topped or Flopped After Trump Won).
This is especially true as Trump criticized drugmakers by saying that they are “getting away with murder” by charging too much for their products. As Americans consume the most pharmaceutical drugs in the world, Trump pledged to initiate a bidding process for drug cost. The move, if enacted, would erode the profitability of the industry’s biggest players.
The news has led to a risk-off environment, with many investors pulling out capital from this high growth and high beta sector. In fact, the nine biggest pharmaceutical companies by market cap, namely Johnson and Johnson (JNJ - Free Report) , Pfizer (PFE - Free Report) , Merck (MRK - Free Report) , Amgen (AMGN - Free Report) , AbbVie (ABBV - Free Report) , Bristol-Myers Squibb (BMY - Free Report) , Gilead (GILD - Free Report) , Celgene and Eli Lilly (LLY - Free Report) on the S&P 500 shed roughly $24.6 billion in 20 minutes. This indicates that investors’ faith in these fast growing companies is draining away and that stocks in the space would see rough trading in the coming days.
ETF Impact
Terrible trading in the stock world also sent the biotech and pharma ETFs into deep red on the day. In particular, ALPS Medical Breakthroughs ETF SBIO, BioShares Biotechnology Clinical Trials Fund (BBC - Free Report) and PowerShares Dynamic Biotechnology & Genome Portfolio PBE stole the show in the biotech sector, tumbling at least 3.6% at the close (see: all the Health care ETFs here).
SPDR S&P Pharmaceuticals ETF (XPH) and VanEck Vectors Pharmaceutical ETF (PPH - Free Report) tumbled the most in the pharma sector, losing 3% and 2.3%, respectively.
Below we profile these ETFs in detail and discuss some of the specifics behind their recent slump:
SBIO
This fund targets companies with one or more drugs in Phase II or Phase III FDA clinical trials by tracking the Poliwogg Medical Breakthroughs Index. It is a small cap centric fund, having amassed $100 million in its asset base. The product holds 87 stocks in its basket with a well-diversified portfolio as none of the securities holds more than 4.84% of assets. The product charges 50 bps in fees per year from investors.
BBC
This ETF provides exposure to companies that have a primary product in Phase I, II, or III of FDA trials by tracking the LifeSci Biotechnology Clinical Trials Index. Holding 71 small cap stocks in its basket, the fund is widely spread out as each firm holds no more than 1.95% share. The fund has accumulated $20.2 million in its asset base and charges a higher fee of 85 bps per year.
PBE
This fund provides exposure to 31 firms by tracking the Dynamic Biotech & Genome Intellidex Index. It is well spread across various components as each firm holds less than 6% of assets. However, it is slightly tilted toward small cap securities at 48% while large caps account for 41% share. The product has managed $224.9 million in its asset base and has an expense ratio of 0.58% (read: Biotech & Pharma ETFs to Suffer in 2017 Too?).
XPH
This fund provides exposure to pharma companies by tracking the S&P Pharmaceuticals Select Industry Index. In total, the product holds 39 securities with none accounting for more than 5.2% share. Here also, small caps make up for the larger chunk at 45%. XPH has AUM of $467 million and charges 35 bps in fees a year.
PPH
This ETF follows the MVIS US Listed Pharmaceutical 25 Index and holds 26 stocks in its basket with heavy concentration on the top firm with a double-digit allocation. Other firms hold no more than 7.74% of the portfolio. PPH is a large cap centric fund and has amassed $267 million in its asset base. It charges 36 bps in annual fees.
What’s Ahead?
Despite the slide, the outlook for the sector is promising. Biotech ETFs and pharma ETFs are still up since the November election and the ultra-popular iShares Nasdaq Biotechnology ETF (IBB - Free Report) has gained 6.2% in the same time frame.
Encouraging industry trends including a merger and acquisition frenzy, earnings growth, promising drug launches, cost-cutting efforts, expansion into emerging markets, ever-increasing demand for new drugs, higher healthcare spending, aging population and a proposed Trump policy of lowering corporate taxes will continue to fuel growth in the sector. Additionally, biotech and pharma ETFs seem cheap, making them attractive bets at present (read: 5 Reasons to Buy 5 Low P/E Biotech ETFs).
Further, the five products detailed above have a Zacks ETF Rank of 2 (Buy) or 3 (Hold), suggesting that these have the potential to outperform in the coming months.
Given the solid outlook but somewhat bearish near-term sentiments, investors may want to consider staying on the sidelines for the time being. However, risk tolerant long-term investors may see this recent slump as a buying opportunity, should they have the patience for extreme volatility.
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Trump Attacks Biotech & Pharma: ETFs Bleed
The pharma and biotech industry is a victim of concerns over increased regulatory scrutiny on high drug prices over the past two years. The worries cooled down after Trump’s victory, and gave biotech stocks a shot in the arm. But the trend has reversed again following Trump's first press conference held yesterday (read: ETFs & Stocks That Topped or Flopped After Trump Won).
This is especially true as Trump criticized drugmakers by saying that they are “getting away with murder” by charging too much for their products. As Americans consume the most pharmaceutical drugs in the world, Trump pledged to initiate a bidding process for drug cost. The move, if enacted, would erode the profitability of the industry’s biggest players.
The news has led to a risk-off environment, with many investors pulling out capital from this high growth and high beta sector. In fact, the nine biggest pharmaceutical companies by market cap, namely Johnson and Johnson (JNJ - Free Report) , Pfizer (PFE - Free Report) , Merck (MRK - Free Report) , Amgen (AMGN - Free Report) , AbbVie (ABBV - Free Report) , Bristol-Myers Squibb (BMY - Free Report) , Gilead (GILD - Free Report) , Celgene and Eli Lilly (LLY - Free Report) on the S&P 500 shed roughly $24.6 billion in 20 minutes. This indicates that investors’ faith in these fast growing companies is draining away and that stocks in the space would see rough trading in the coming days.
ETF Impact
Terrible trading in the stock world also sent the biotech and pharma ETFs into deep red on the day. In particular, ALPS Medical Breakthroughs ETF SBIO, BioShares Biotechnology Clinical Trials Fund (BBC - Free Report) and PowerShares Dynamic Biotechnology & Genome Portfolio PBE stole the show in the biotech sector, tumbling at least 3.6% at the close (see: all the Health care ETFs here).
SPDR S&P Pharmaceuticals ETF (XPH) and VanEck Vectors Pharmaceutical ETF (PPH - Free Report) tumbled the most in the pharma sector, losing 3% and 2.3%, respectively.
Below we profile these ETFs in detail and discuss some of the specifics behind their recent slump:
SBIO
This fund targets companies with one or more drugs in Phase II or Phase III FDA clinical trials by tracking the Poliwogg Medical Breakthroughs Index. It is a small cap centric fund, having amassed $100 million in its asset base. The product holds 87 stocks in its basket with a well-diversified portfolio as none of the securities holds more than 4.84% of assets. The product charges 50 bps in fees per year from investors.
BBC
This ETF provides exposure to companies that have a primary product in Phase I, II, or III of FDA trials by tracking the LifeSci Biotechnology Clinical Trials Index. Holding 71 small cap stocks in its basket, the fund is widely spread out as each firm holds no more than 1.95% share. The fund has accumulated $20.2 million in its asset base and charges a higher fee of 85 bps per year.
PBE
This fund provides exposure to 31 firms by tracking the Dynamic Biotech & Genome Intellidex Index. It is well spread across various components as each firm holds less than 6% of assets. However, it is slightly tilted toward small cap securities at 48% while large caps account for 41% share. The product has managed $224.9 million in its asset base and has an expense ratio of 0.58% (read: Biotech & Pharma ETFs to Suffer in 2017 Too?).
XPH
This fund provides exposure to pharma companies by tracking the S&P Pharmaceuticals Select Industry Index. In total, the product holds 39 securities with none accounting for more than 5.2% share. Here also, small caps make up for the larger chunk at 45%. XPH has AUM of $467 million and charges 35 bps in fees a year.
PPH
This ETF follows the MVIS US Listed Pharmaceutical 25 Index and holds 26 stocks in its basket with heavy concentration on the top firm with a double-digit allocation. Other firms hold no more than 7.74% of the portfolio. PPH is a large cap centric fund and has amassed $267 million in its asset base. It charges 36 bps in annual fees.
What’s Ahead?
Despite the slide, the outlook for the sector is promising. Biotech ETFs and pharma ETFs are still up since the November election and the ultra-popular iShares Nasdaq Biotechnology ETF (IBB - Free Report) has gained 6.2% in the same time frame.
Encouraging industry trends including a merger and acquisition frenzy, earnings growth, promising drug launches, cost-cutting efforts, expansion into emerging markets, ever-increasing demand for new drugs, higher healthcare spending, aging population and a proposed Trump policy of lowering corporate taxes will continue to fuel growth in the sector. Additionally, biotech and pharma ETFs seem cheap, making them attractive bets at present (read: 5 Reasons to Buy 5 Low P/E Biotech ETFs).
Further, the five products detailed above have a Zacks ETF Rank of 2 (Buy) or 3 (Hold), suggesting that these have the potential to outperform in the coming months.
Given the solid outlook but somewhat bearish near-term sentiments, investors may want to consider staying on the sidelines for the time being. However, risk tolerant long-term investors may see this recent slump as a buying opportunity, should they have the patience for extreme volatility.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>