Biotech stocks and ETFs have been going through the roof in the fourth quarter. Mergers and acquisitions, especially in the cancer treatment domain, positive drug data, upbeat financials and decent valuations are making the space a clear winner.
Apart from favorable financials and valuations plus mergers and acquisitions, the sector is brimming with upbeat drug data. There were 46 drug approvals in 2017 followed by 59 and 41 nods to date in 2019. Though the momentum of approvals slackened a bit, it can still be considered healthy.
The Nasdaq Biotechnology Index has gained 16.7% in the past three months, crushing the S&P 500’s 7.7% gain. The recent rally pulled the biotech index up from a third-quarter slump, bringing its year-to-date performance (up 25.1%) almost in line with the broader market index’s rally of 28.3% (read: Beyond Biotech, 5 ETFs Up At Least 10% in Q4).
As a result, Virtus LifeSci Biotech Clinical Trials ETF (BBC - Free Report) has soared as much as 56.9% this year so far, thus being one of the best ETFs. Another runaway success in this space was ALPS Medical Breakthroughs ETF (SBIO - Free Report) (up about 50%)(read: Why Biotech ETFs are Surging to New Highs).
The S&P 500 health-care sector has now notched a 10th successive week of gains, which is its longest winning streak since the 11 weeks ended Feb 6, 2004, according to Dow Jones Market Data as quoted in Wall Street Journal.
Will the Rally Continue in 2020?
Next year is the presidential election year. Wedbush analyst Laura Chico wrote, “the Nasdaq Biotechnology Index has a mean annual return of 5% in election years since 2000, versus 12% in non-election years”.
Election year sparks a number of uncertainties for biotech investors as drug price gauging issues often come to the forefront. The Democratic-controlled House of Representatives recently approved legislation to allow wide-ranging negotiation of drug prices directly by the federal Medicare program.
But then, chief investment officer of BNY Mellon’s Lockwood Advisors believes that chances of a more progressive candidate’s win in 2020 are slim, which is helping the biotech industry. However, along with many other analysts, we too believe that continued deal activity and an optimistic sentiment will support the biotech companies in the first half of 2020.
It is important to note that the biotech sector is high-risk in nature because “the companies often have no income-generating products and biotech drugs in development have no guarantee of receiving government approval,” per the Wall Street Journal.
Everything now depends on global economic growth and the success of drug data. If global economy sustains on a solid footing, accessibility of funds (needed to keep the research going and successful) would be easier for the biotech companies, both from international and domestic sources.
An ease in U.S.-Sino trade tensions is another tailwind for the sector. Chinese venture firms are known for ample investments in the U.S. biotech sector. Chinese venture capital funding in the U.S. biotech sector plunged about 60% year over year in the first six months of 2019 “due mainly to tightened investment security measures imposed by Washington, according to Pitchbook Data cited in the Financial Times.” With ebbing trade tensions, we expect the rebound in Chinese investments. Notably, the United States has so far been identified as the top haven for such investments from China.
Biotech ETFs in Focus
Biotech ETFs like SPDR S&P Biotech ETF (XBI - Free Report) , iShares Genomics Immunology and Healthcare ETF (IDNA - Free Report) ,iShares Nasdaq Biotechnology ETF (IBB - Free Report) , Loncar Cancer Immunotherapy ETF (CNCR - Free Report) , Robo Global Healthcare Technology and Innovation ETF (HTEC - Free Report) and Invesco Dynamic Biotechnology & Genome ETF (PBE - Free Report) are some of the ETFs that can win in 2020.
This is because growing usage of AI and robotics in the healthcare space, rapid developments in genomics market and huge demand for cancer research are expected to bump up the biotech space in the long term (read: Stocks & ETF to Invest in Healthcare Robotics and Innovation).
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