The best biotech ETF and its top 5 picks

by Nicholas Vardy, editor The Alpha Investor Letter

There are two ways you can play the biotech investment game. You bet big on a single stock or you can buy a diversified fund that invests across the sector.

I think the best way to invest in the sector is through a biotechnology ETF, which gives you broad exposure to the sector, while limiting your specific, company risk. You won’t make 90% overnight with an ETF. But at least you’ll sleep a lot better.

iShares Nasdaq Biotechnology (IBB) casts the widest net across the industry, with 121 holdings. Weighted heavily in favor of large-cap, stable health-care giants, this ETF is your best bet if you are a conservative investor.

I rate the ETF a buy with a  stop at $103. Here’s a brief run down of IBB’s top-five, largest investments, which together account for 33.86% of its total holdings.

The key product from Rengeron Pharmaceuticals (REGN) is EYLEA for the treatment of neovascular age-related macular degeneration. Advanced macular degeneration is a common eye condition among people age 50 and older. It is the leading cause of vision loss in older adults.

On the list awaiting FDA approval is Aflibercept, commonly referred to as Zaltrap — a protein fusion agent developed in partnership with Sanofi Aventis.

The drug aims to prevent angiogenesis of blood vessel development into tumors. (REGN accounts for 7.63% of IBB’s holdings.)

Amgen (AMGN) was one of the pioneers of the biotech world, and boasts a relatively mature business with stable cash flow and a healthy dividend yield.  

Acting much like Big Pharma, it has focused on acquiring emerging market generic drug companies, partnered with Watson (WPI) for biosimilars development, and out-licensed non-core drugs to AstraZeneca (AZN).

In the recent past, Amgen has acquired Micromet for $1.2 billion, KAI Pharmaceuticals for $315 million and BioVex for $425 million. It also acquired Bergamo for $215 million in Brazil and Turkey’s MN Pharmaceuticals. (AMGN attracted 7.38% of IBB’s holdings.)

Alexion Pharmaceuticals (ALXN) has a leading drug called Soliris, a $500,000-a-year pharmaceutical approved to treat paroxysymal nocturnal hemoglobinuria (PNH), an ultra-rare red blood cell disease. Along with the US, Soliris is approved for PNH in the European Union (EU), Japan and many other countries.  

Alexion is also expanding Soliris’ label — that is, the diseases Soliris can be used to treat, such as atypical Hemolytic Uremic Syndrome (aHUS), an ultra-rare, chronic and life-threatening disease. (ALXN represents 7.32% of IBB’s holdings.)

Celgene (CELG) focuses on treatments for cancer and immune inflammatory diseases primarily in the US and Europe. Abraxane has already been approved by the FDA for the treatment of breast cancer and the FDA will decide whether to extend it to lung cancer treatment in October.

Other FDA-approved drugs include Revlimid, for the treatment of multiple myeloma and MDS; Vidaza, for the treatment of MDS and acute myeloid leukemia; Thalomd, for the treatment of multiple myeloma; and Istodax, for the treatment of a specific form of T-Cell lymphoma.

Celgene also has a long pipeline of drugs in various clinical trial stages under the categories of hematology, oncology, inflammation and immunology. (CELG has netted 5.83% of IBB’s holdings.)

Gilead Sciences (GILD) has skyrocketed since 1987 to become a leading biopharmaceutical company with a portfolio of 14 marketed products and a growing channel of investigational drugs.

Growth prospects of Gilead’s HIV drugs Truvada and Atripla look very promising. The company continues to expand with collaborations, by making acquisitions and introducing new products. (GILD’s share of IBB holdings is 5.70%.)

Learn more about this financial newsletter at Nicholas Vardy's The Alpha Investor Letter.

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