LifeSci Index Partners LLC today did a double-fisted product launch with two passively managed biotechnology exchange-traded funds centered on opposite ends of the product spectrum––one focuses on companies with lead drugs in human clinical trial stages; the other on companies with approved products.
As its name implies, the BioShares Biotechnology Clinical Trials Fund (BBC) invests in companies focused on testing their experimental drug candidates in human clinical trials. These generally are smaller and younger companies with no revenue or profits, and which stay in business by managing their cash burn rate and equity financing strategy as their products wend their way through the Food and Drug Administration testing process in hopes of creating a blockbuster drug.
The BioShares Biotechnology Products Fund (BBP) invests in companies with at least one FDA-approved drug on the market. As noted in the company literature, these are more established companies with “much clinical trial failure risk behind them.”
The BBC fund tracks the LifeSci Biotechnology Clinical Trials Index, while the BBP fund mirrors the LifeSci Biotechnology Products Index. Both indexes were developed by LifeSci Index Partners, a New York City-based investment advisor and index provider. The company says the indexes were created by scientists with PhDs in organic chemistry, molecular biology and neurobiology, as well as seasoned investment professionals with experience in the health-care field.
Both funds sport an expense ratio of 0.85 percent, which depending on your cost sensitivity is significantly more than the range of 35 to 60 basis points charged by existing biotech ETFs.
But LifeSci executives say the extra cost is part of the process of creating biotech indexes that are unlike the indexes that underpin other biotech funds.
“We’ve created indexes that are pure biotech companies, says Paul Yook, LifeSci Index Partners’ co-founder and portfolio manager. “By our analysis, the other biotech indexes that ETFs are based on are between 65 percent and 88 percent biotech.”
He adds that other biotech-related indexes include generic drug companies, life science companies that make research and laboratory equipment, and other biotech-related companies that aren’t actually biotech stocks.
“Our argument is if you want to buy a biotech fund, you should buy pure biotech,” Yook says. He notes the bifurcation between companies strictly in the clinical trials stage and those with products on the market hasn’t been done before, and the two different funds resulting from that provides investors with different options in the sector regarding risk/reward profile.
“Biotech is one of the most dynamic sectors in the market today,” Yook says. “We’re very optimistic about the outlook for 2015 and beyond. The difference in expense ratios measured in basis points [between the BioShares ETFs and existing biotech funds] isn’t that meaningful in the context of the expected growth in biotech.”