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Trump, Biogen and Amgen Hammer Healthcare ETFs

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After making a strong comeback in February, the U.S. healthcare sector again witnessed some pain in the last couple of sessions. The initial sell-off came after Trump’s budget blueprint, which signaled higher regulatory costs for the sector and a cut in federal funding for medical research.

The President proposed to double U.S. Food and Drug Administration (FDA) medical product user fee to over $2 billion for 2018 and cut the National Institute of Health (NIH) funding by approximately $5.8 billion, which would push down the budget to $25.9 billion. This has swept away the positive sentiment in the space (read: Trump Unveils First Budget Blueprint: ETFs to Gain or Lose).

Additionally, the downgrade of Biogen (BIIB - Free Report) by two analysts on Thursday and the long-awaited trail results for Amgen’s (AMG - Free Report) N) anti-cholesterol drug Repatha on Friday resulted in lackluster trading.

Biogen in Focus

Biogen fell about 5% on Thursday and an additional 1% on Friday after two analysts – Leerink and Morgan Stanley – downgraded the stock and slashed the target price to market perform with a $300 price target and equal-weight with a $305 price target, respectively.

The move dragged down other health care stocks, including Pfizer (PFE - Free Report) , Amgen, Celgene (CELG - Free Report) , Abbott Laboratories (ABT - Free Report) and Thermo Fisher Scientific (TMO - Free Report) .

Amgen in Focus

While the clinical study, known as Fourier, was positive for Amgen, it raised concerns over the astronomical pricing of Repatha at $14,523 for one year of treatment. Repatha reduces the risk of heart attack by 27%, stroke by 21% and coronary revascularization by 22% in patients with heart disease, according to a recent study conducted on 27,564 patients. This is much better than any other cholesterol-lowering statin drugs (read: Time to Buy Biotech ETFs?).

However, the drug will continue to face limited access by pharmacy benefit managers and health insurers due to its steep price. As a result, the trial results pushed down Amgen shares by 6.4% on Friday, and sent shockwaves amog biotech stocks and other drug makers with cholesterol-lowering therapies in development stage. In particular, Esperion Therapeutics (ESPR - Free Report) and Medicines Company (MDCO - Free Report) tanked 20.2% and 8%, respectively, at the close.

ETF Impact

While most of the healthcare ETFs were in the red over the past two days, VanEck Vectors Biotech ETF BBH was the largest loser shedding 2.8%. Other ETFs – iShares Nasdaq Biotechnology ETF (IBB - Free Report) , PowerShares Dynamic Biotechnology & Genome Portfolio PBE, BioShares Biotechnology Products Fund BBP, PowerShares Dynamic Pharmaceuticals Fund PJP, and SPDR S&P Pharmaceuticals ETF XPH tumbled over 2% (see: all the Health care ETFs here).

Broad healthcare ETFs Health Care Select Sector SPDR Fund (XLV - Free Report) , Vanguard Health Care ETF (VHT - Free Report) and iShares U.S. Healthcare ETF (IYH - Free Report) lost at least 1.5% in the last two sessions.

What’s Ahead?

Despite the slide, the outlook for the sector is promising. Encouraging industry trends including hopes of increased M&A activity, an accelerated pace of innovation, promising drug launches, growing importance of biosimilars, cost-cutting efforts, an aging population, expanding insurance coverage, growing middle class, an insatiable demand for new drugs, ever-increasing health care spending, and the proposed Trump’s policy of lower corporate taxes will continue to fuel growth in the sector.

Additionally, healthcare ETFs seems cheap, making them attractive bets at present. Notably, XLV currently has a P/E ratio of 16.41 versus 18.41 for SPY. Added to this strength is its non-cyclical nature, which provides a defensive tilt to the portfolio. Amid all the uncertainty over Trump’s policy implementation and fears of political instability, defensive stocks could be compelling choices for investors (read: Hit ETFs & Stocks from the Top Sector of February).

Further, the health care funds have a Zacks ETF Rank of 3 or ‘Hold’ rating, suggesting room for upside in the coming months.

Given the solid outlook but somewhat bearish near-term sentiments, investors may want to consider staying on the sidelines for now. However, risk tolerant long-term investors may consider this recent slump as a buying opportunity, should they have the stomach for extreme volatility.

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