With Trump winning the U.S. presidential election, the biotech and pharma sectors have regained their lost ground. Since Clinton – who has long been vocal against the price gouging issue in the pharma sector – is no more threat to the sector, pharma and biotech stocks should get a break from controversies, at least for some time.
As a result, biotech ETFs soared in the last five trading sessions (as of November 10, 2016), returning in the range of 15.8–26% (read: How Hillary Clinton Crushed Biotech ETFs with One Tweet).
An end to the price-gouging issue is perhaps the key driver of the latest biotech rally. However, four other factors elaborated below may also have been instrumental in setting biotech and pharma stocks northbound for the days to come (read: Biotech ETFs in Focus After Mylan's EpiPen Controversy).
The sector, which has long been an investors’ favorite and saw an enormous run from late 2011 till summer 2015, has lost its luster from the year-to-date look. The risk-off sentiments prevalent in the early part of 2016 hit this high-beta high growth area. As a result, despite rebounding massively in recent times, the biotech ETF SPDR S&P Biotech ETF (XBI - Free Report) is off about 6% this year (as of November 10, 2016) (read: Biotech ETFs Hit 52-Week Lows: Time to Buy?).
Investors should also note that such a steep sell-off brought down the once sizzling hot biotech space to a calmer valuation. XBI has a P/E ratio of 16.56 times versus SPDR S&P 500 ETF’s (SPY - Free Report) P/E of 17.73.
Same was the case for pharma ETFs which are off 7.8–18% so far this year. But SPDR S&P Pharmaceuticals ETF (XPH - Free Report) has a P/E of 12.92 times, though other pharma ETFs are still richly valued. If we look at the overall medical sector, P/E ratio of the S&P 500 stands at 18.8 times for next year while the medical sector’s is at 15.4 times, as per the Earnings Trends issued on November 9, 2016.
Now it is time to look at the earnings picture. The medical sector has logged 6.3% earnings growth in Q3 on 7.3% higher revenues. Notably, so far, revenue growth is the second highest in the 16 major sectors classified under the S&P 500 index.
Lower Corporate Taxes in the Cards?
As per an article published on barrons.com, corporate tax reform and cash access may facilitate biotech stocks and ETFs ahead. In his campaign, Trump indicated that he will reduce corporate tax to 15% and provide a one-time repatriation holiday of 10%. This lower tax rate would do wonders for big biotech companies like Biogen which can see EPS rising by about 10%, as per the article.
Smaller-cap biotech firms would be especially benefited as they are so cash-stripped that their present cash holdings can fund just 11 months of research, as per Reuters.
Wave of Mergers & Acquisitions
This new-found source of cash would help several biotech companies to indulge in merger and acquisition activities. In any case, the space was known for inorganic growth. Although Allergan Plc (AGN - Free Report) announced back-to-back takeover deals in late September and Pfizer Inc (PFE - Free Report) announced its $14 billion acquisition of cancer drugmaker Medivation in August, deals have cooled down (off 65% year over year) in the sector lately (read: Biotech ETFs in Focus on Tobira Therapeutics' Massive Gain).
Health care investors see “renewed interest in some prime targets of takeover speculation, from cancer drug specialists like Tesaro to rare diseases firms like Sarepta Therapeutics.” Moreover, the sector’s valuation is subdued at present, opening door for acquisitions at cheaper prices.
ETFs to Buy
We suggest buying low P/E biotech ETFs at this moment to make the most of the election-induced surge.
SPDR S&P Biotech ETF (XBI - Free Report) – P/E 16.56 times
BioShares Biotechnology Products Fund (BBP - Free Report) – P/E 18.03 times
VanEck Vectors Biotech ETF (BBH - Free Report) – P/E 18.08 times
ALPS Medical Breakthroughs ETF SBIO – P/E 19.36 times
First Trust NYSE Arca Biotechnology Index Fund (FBT - Free Report) – P/E 19.99 times
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