What's Behind the Biotech ETF Rally to Start 2019?

Sanghamitra Saha Published on January 24, 2019

This year, biotech stocks have seen their best-ever start to a year since 2012. A solid merger-and-acquisition momentum has been instrumental in this rally. The announcement of the mega-merger deal between Bristol-Myers (BMY - Free Report) and Celgene at the beginning of 2019 has set the space on fire. Bristol-Myers has offered $74 billion to take over Celgene.

Also, Eli Lilly and Company (LLY - Free Report) has announced that it will acquire Loxo Oncology for $8 billion to expand its oncology portfolio to precision medicines or targeted therapies. The winning momentum started from December 2018, when Glaxo (GSK - Free Report) offered to acquire TESARO for almost $5.1 billion. With this deal, Glaxo will gain access to TESARO’s PARP inhibitor, Zejula, which is approved for ovarian cancer.

More Deals Ahead?

Heightened speculation about increasing consolidation in the cancer space is doing rounds. Analysts have predicted a sizable increase in merger and acquisition activity in both drugmakers and medical device corners in 2019.

Needless to say, all these acquisitions have acted as a cornerstone in the industry. A few of the novel drugs approved in 2018 for treating cancer are from smaller biotechs. This makes them lucrative acquisition targets. As a result, smaller biotech companies like Clovis Oncology , Epizyme and Blueprint Medicines (BPMC - Free Report) have been on a tear this year.

Eli Lilly’s chief executive officer affirmed its desire to ink more deals in the areas of cancer, neuroscience and immunology. Investors should note that biotech giants are cash rich and can pay rich premium if they eye any specific company, per Bloomberg. Gilead Sciences (GILD - Free Report) , Biogen (BIIB - Free Report) , AbbVie (ABBV - Free Report) and AstraZeneca (AZN - Free Report) can act as potential acquirers down the line.

Success Story Beyond Cancer

While researches and approvals have been solid in the oncology space, the other areas have also held strong. Some of the key approvals so far this year include that of Gilead Sciences’ HIV regimen, Biktarvy; Vertex Pharmaceuticals’ Symdeko (tezacaftor/ivacaftor and ivacaftor) for the treatment of cystic fibrosis (CF); Regeneron Pharmaceuticals’ Libtayo and BioMarin’s Palynziq for the treatment of phenylketonuria. Sage Therapeutics (SAGE) reported positive late-stage data on its treatment for postpartum depression.

Upbeat Zacks Rank

The Medical - Biomed/Genetics sub-industry currently comes from the top-ranked Zacks industry (top 21%). The index is up 11.54% this year compared with 6.54% gains in the iShares Core S&P 500 ETF (IVV).

Any Roadblock Ahead?

While momentum is pretty strong and is likely to stay the same ahead, the ongoing U.S. government shutdown could play foul. There are products in the pipeline awaiting review at the U.S. Food and Drug Administration and the shutdown is not helping, as quoted on Bloombergquint. However, even if there is a short-term lull, the momentum should pick up once the impasse clears.

ETFs in Focus

Against this backdrop, investors may want to have a look at some of the wining biotech ETFs of this year.

Principal Healthcare Innovators Index ETF (BTEC) – Up 14.20%

Virtus LifeSci Biotech Products ETF (BBP) – Up 14.0%

VanEck Vectors Biotech ETF (BBH) – Up 13.4%

First Trust Amex Biotechnology Index (FBT) – Up 13.4%

iShares Nasdaq Biotechnology ETF (IBB - Free Report) – Up 12.7%

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