Thursday May 31, 2012
by Steven Silver, S&P Capital IQ, The Outlook
Our positive fundamental outlook for the biotechnology sub-industry over the next 12 months reflects what we view as enhanced prospects for new drug approvals and a favorable outlook for mergers and acquisitions involving biotech companies.
Improving business conditions for these companies powered a strong rally in 2011 and in 2012 as well: the index was up 21.3% for the year to date through May 11 versus a 7.8% gain for the S&P 1500.
In 2011, the U.S. FDA approved 30 new drugs compared to just 21 in 2010. We see an improving trend for FDA first cycle review approvals, and a rise in the rate of new drug approvals for rare diseases.
We also see a favorable climate for M&A transactions involving biotech companies, and note several recent attempts by large pharmaceutical companies to acquire biotech companies.
We see these larger firms acting to offset billions of dollars in revenue recently lost or set to be lost over the coming years from expiring drug patents.
In addition, we see the larger biotech companies becoming more active as acquirers, seeking to boost their drug pipelines amid maturing legacy products and declining productivity trends.
We think these trends are hastening a blurring of the lines of distinction between the pharmaceutical and biotech industries.
Biotechnology investing, in our view, carries potential for above-average performance but with a higher inherent risk profile.
Investors seeking exposure to the industry may want to consider the following two biotech-focused exchange traded funds: SPDR S&P Biotech ETF (XBI), and iShares Nasdaq Biotechnology Index Fund (IBB).
XBI, which tracks the S&P Biotechnology Select Industry Index, has about $570 million in assets, making it one of the larger health care related ETFs.
Launched in January 2006, it owns 48 individual holdings, with the top 10 holdings representing about 35% of total assets. Over the 12 months through April 30, 2012, XBI had a total return of 9.56%.
IBB holds NASDAQ-listed companies classified as either biotechnology (68%, as of March 31, 2012) or pharmaceutical (24%). It had a 12-month total return of 14.8% through April 30, 2012.
Learn more about this financial newsletter at S&P's The Outlook.