5 Reasons Why Biotech ETFs Are Soaring

The biotech sector is going through the roof right now with SPDR S&P Biotech (MX:XBI) ETF XBI adding over 9.4% in the last five days (as of June 21, 2017). On June 21, the fund added over 4.2%, being on track to log “its best weekly performance since March 13.” Several biotech ETFs have been hitting highs this week as the biotechnology index had the “best three-day streak since November.”

A host of factors are powering the rally and we highlight some below.

Fears Over Price Gouging Ebbing

The pharma and biotech industry has been hit hard in recent times on the price gouging issue. The issue was first raised by Hillary Clinton in September 2015 and since thenthe space has been battered by increasing political and media focus on high prices for some drugs. Even President Trump occasionally bothered the sector on this issue.

However, the stringent approach is easing, allowing investors to enter the space all over again. As per an analyst, the lowering of the entry barrier will now be aimed at countering the price gouging issuer rather than hitting the prices directly (read: Trump Tweet on Drug Pricing Hits Biotech and Pharma ETFs).

AHCA to Benefit

President Donald Trump has basically pledged to reduce FDA regulations, which may prove to be a boon to the space. The republican proposed American Health Care Act (AHCA) would benefit companies by removing billions of dollars in taxes and fees on pharmaceutical and medical-device manufacturers.

As per an article published on Bloomberg, “extending the patent life of drugs in foreign markets; promoting U.S. drug market competition; value-based agreements; and issuing U.S. Treasury bonds to drug manufacturers to help pay for expensive treatments” will now be the focus.

Next week, the Senate is likely to vote on the health-care reform bill. If AHCA clears this hurdle, it might be a blessing for biotech, or rather the broader health care space.

Positive Clinical Trials

Successful clinical trials for new drugs has been another tailwind for the space. Clovis Oncology (NASDAQ:CLVS) shares gained 46.5% on June 19 following the company’s positive cancer drug data. The company said 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 for the entire space (read: 4 Stocks & ETFs to Buy on Clovis' Positive Drug Data).

Increasing M&A Activity

Merger and acquisitions have been great for biotech companies in the last few years to reduce competition for the same kind of offerings and attain synergies. And the activity is expected to continue in the coming days as well.

For example, Clovis’ drug news led rival Tesaro's shares to decline, as per the source as the latter also works on the same line. As a result, many investors have started speculating that the merge is possible somewhere down the line. In fact, Tesaro’s acquisition rumors are rife since September 2016 (read: Merger Arbitrage 101: Investing in Acquisitions with an ETF?).

Compelling Valuation

Biotech stocks were the most hurt among the S&P 500 members last year. This has probably made the space cheap and helped it to be back with a bang. Biotech ETF XBI has added about 32.9% so far this year (as of June 21, 2017) while SPDR S&P 500 ETF (NYSE:SPY) SPY is up 9.7%. Biotech stocks now “trade at an average 16.4 times projected 12-month earnings, compared with 17.7 for the benchmark, the narrowest discount in more than 10 months,” as per Bloomberg.

ETFs to Tap at Highs

Below we highlight a few biotech ETFs that are on a 52-week high and may log more return’s ahead.

Direxion S&P Biotech Bull 3X LABU

Ultrapro Nasdaq Biotechnology Proshares UBIO

ProShares Ultra Nasdaq Biotechnology BIB

iShare Nasdaq Biotech ETF IBB

Bioshares Biotech Clinical Trial (HM:BBC)

VanEck Vectors Biotech ETF (LON:BBH)

Bioshares Biotech Products (BS:BBP)

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