The biotech sector has had a great year, with SPDR S&P Biotech ETF (XBI - Free Report) adding over 39% (as of Dec 11, 2017). Ebbing tensions over the price gouging issue, hopes of easing regulation, positive clinical trials, FDA approvals of drugs and success in the immune-oncology field led to this rally.
One of the top-performers in the space,Virtus LifeSci Biotech Clinical Trials ETF (BBC - Free Report) , is up about 50.8% in the year-to-date frame (as of Dec 11, 2017). However, a steep price rise results in overvaluation concerns. Many may fear high-beta sell-off in the space next year.
Below we highlight a few factors that could power the rally.
Likely Tax Reform
With the tax reform a few hurdles away from enactment, there is a reason to cheer for biotech stocks. The reforms seek to lower the corporate tax rate from 35% to 20%, which can boost drug/biotech companies. The change in tax code will also permit companies to bring back huge cash held overseas at a one-time tax rate of 10% (read: Senate Passes Tax Bill: 5 ETFs to Buy Now).
Upbeat Clinical Trials & FDA Approvals
Successful clinical trials for new drugs are also acting as tailwinds for the space. Notable improvement was noted in cancer drug data. Clovis Oncology (CLVS - Free Report) said in June that the clinical trial data on its ovarian cancer drug treatment indicated that it may substantially help more patients than expected. The news acted as a catalyst to the entire space (read: 4 Stocks & ETFs to Buy on Clovis' Positive Drug Data).
This month, impressive clinical data on blood-disorder medications were released. Among breakthrough U.S. Food and Drug Administration (FDA) approvals, Vertex Pharmaceuticals’ (VRTX - Free Report) new FDA approval for cystic fibrosis drug and the Novartis AG breakthrough gene transfer treatment were notable.
Merger and Acquisitions to Perk Up
Tax reform and cash repatriation may lead to a rise in biotech merger and acquisitions. In any case, mergers and acquisitions over the last few years have been great for biotech companies to reduce competition for the same kind of offerings and attain synergies. Tax reform should leave companies with more cash to pursue their dream deals. Expectations are rife that big players like Sanofi, Pfizer and Merck will announce M&A deals in 2018.
ETFs to Tap
That said, we would like to note that overvaluation may come in the way of the rally. So, it’s better to bet on ETFs that still have low valuation. For that, below we highlight a few biotech ETFs that have considerably a low P/E in the sector and can benefit investors with solid gains (see all Health Care ETFs here).
SPDR S&P Biotech ETF (XBI - Free Report) – P/E 16.41x
VanEck Vectors Biotech ETF (BBH - Free Report) – P/E 18.14x
Loncar Cancer Immunotherapy ETF (CNCR - Free Report) – P/E 20.01x
iShares Nasdaq Biotechnology ETF (IBB - Free Report) – P/E 21.98x
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