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Is Now the Right Time to Embrace Biotech ETFs?

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Following an initial rise in revenues due to the high demand for COVID-19 vaccinations and antiviral therapies during the pandemic, the biotech industry saw revenue stabilization in 2022. Revenues at public biotech companies fell 1% year on year as demand for pandemic-related products fell.

According to an EY report, on multiple fronts, the biotech industry is facing significant hurdles. Established biotech firms and large pharmaceutical companies have been trying to overcome innovation gaps and create new revenue streams to offset the oncoming wave of patent expirations. Emerging biotech companies, on the other hand, are bound by limited funding and are largely focused on attaining the next value milestone while minimizing expenses.

What Lies Ahead?

To succeed in the face of challenges, the biotech industry must streamline processes and drive savings across all stages, from R&D to commercialization. Despite obstacles like distressed markets and regulatory scrutiny, the industry's inherent strengths will fuel the ongoing expansion.

Effective allocation of resources and adaptability to market changes are essential for navigating the path ahead. While challenges exist, the industry's long-term innovation capacity remains robust, enabling biotech firms to overcome hurdles and continue growing through efficiency improvements.

Limited But Growing Appetite for M&A

Factors like global macroeconomics, geopolitical conflict and increased FDA inspection are all contributing to the biotech industry's low M&A activity. The FTC's regulatory monitoring is also expected to have a long-term impact, impeding inorganic expansion initiatives in the foreseeable future.

However, according to Healthcare Dive, deal-making in the health services sector has experienced significant growth over the past two years, with 1,661 deals valued at $85.2 billion from May 2022 to May 2023. Despite a recent dip, the sector has shown resilience, and deal volume remains higher than pre-pandemic levels. In the pharmaceutical industry, alliance deals reached a value of $132.1 billion in 2022, marking the third-highest total in a decade.

Challenges Remain Post Bank Failures

Biotechs and investors are grappling with the aftermath of bank failures. The sector experienced a significant decline of 54% in available capital in 2022 compared to the previous years. This decrease, coupled with a decrease in debt financing and a substantial decline in follow-on public offerings and IPOs, has made it challenging for smaller companies to secure the necessary capital. Furthermore, the majority of companies that went public in 2020 and 2021 witnessed a decline in market value, with an average drop of over 50%, adding to the difficulties faced by the industry.

As a result of the U.S. Inflation Reduction Act (IRA) and the Federal Trade Commission's (FTC) intervention in Amgen's acquisition of Horizon Therapeutics, the biotech industry is preparing for a more challenging regulatory landscape.

Innovation & Growth Prospects

Despite the challenges faced by the biotech industry, its capacity for innovation remains strong. Biotech research and development (R&D) efforts are driving a renaissance in the creation of new biopharmaceutical products and platforms. The COVID-19 pandemic further highlighted the sector's strategic importance in addressing global health and security concerns.

According to a report by Precedence Research, the global biotechnology market, valued at $859.94 billion in 2022, is projected to reach approximately USD 1.68 trillion by 2030, at a CAGR of 8.7% from 2023 to 2030. North America leads the market with strong competition, robust R&D and high healthcare spending.

As per the White House, the Biden-Harris Administration is unveiling a new action plan aimed at swiftly and fairly expanding biotechnology and biomanufacturing education and job training initiatives in the United States. This strategy will increase investments in the U.S. bioeconomy and strengthen its position as the world leader in biomanufacturing.

According to DataToBiz, by 2025, the pharma industry is projected to allocate approximately $3 billion toward AI in drug discovery, showcasing its transformative potential.

ETFs in Focus

For investors seeking to benefit from the biotech sector's performance while minimizing risk, we present a range of ETFs that offer substantial exposure to the industry. These ETFs provide an avenue to invest in biotech's potential for success while managing risk effectively.

iShares Biotechnology ETF (IBB - Free Report)

iShares Biotechnology ETF closely tracks the ICE Biotechnology Index and has amassed an asset base of $7.84 billion, making it one of the largest funds in the biotech domain. The fund has a basket of 268 securities and has major allocations to companies like Vertex Pharmaceuticals (VRTX - Free Report) , Amgen (AMGN - Free Report) and Gilead Sciences (GILD - Free Report) , with shares of 8.49%, 8.16% and 7.98%, respectively.

iShares Biotechnology ETF charges an annual fee of 0.44% and has a Zacks ETF Rank #2 (Buy). The fund has generated 5.81% over the past year but has lost 2.28% in the last three months.

SPDR S&P Biotech ETF (XBI - Free Report)

SPDR S&P Biotech ETF closely tracks the performance of the S&P Biotechnology Select Industry Index with a basket of 142 securities. The fund has gathered an asset base of $6.41 billion and charges an annual fee of 0.35%.

SPDR S&P Biotech ETF has a Zacks ETF Rank #2 and has earned 8.36% over the past year and 7.63% in the last three months.

VanEck Biotech ETF (BBH - Free Report)

VanEck Biotech ETF looks to track the performance of the MVIS US Listed Biotech 25 Index with a basket of 26 securities. The fund has an asset base of $479.74 million and charges an annual fee of 0.35%.

The fund has major allocations in Amgen (12.33%), Gilead Sciences (9.05%) and Vertex Pharmaceuticals (8.46%), each with a Zacks ETF Rank #4 (Sell). VanEck Biotech ETF has garnered 5.02% over the past year but lost 3.83% in the last three months.

ARK Genomic Revolution ETF (ARKG - Free Report)

ARK Genomic Revolution ETF employs an active strategy with a basket of 45 securities. The fund has gathered an asset base of %2.06 billion and charges an annual fee of 0.75%.

ARK Genomic Revolution ETF has earned 3.63% over the past year and 14.15% in the last three months. 

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