The Standard & Poor’s 500 Biotechnology Index gained 74 percent last year compared with a 30 percent increase in the entire S&P 500 Index. Pharmaceuticals and biotechnology companies jumped 9.3 percent this year as a group, beating all other 23 industries in the S&P. Institutional investors who don’t specialize are using ETFs to get in on that rise, according to Ravi Mehrotra, a New York-based analyst at Credit Suisse Group AG.
“The central key reason for the biotech sector’s stellar performance since 2011 has been generalist inflows,” Mehrotra said in a Feb. 27 note to clients.
The funds offer an easy way into drug and biotechnology stocks. “If you’re an institutional investor, and you’re not a health-care specialist, and the sector is outperforming, the fastest way to get to an equal-weight or over-weight exposure is through ETFs,” Funtleyder said.
Biotechnology companies are bringing new medicines to market, while pharmaceutical companies have managed to move past the loss of top drugs from patent expirations.
Gilead’s Rise
Gilead Sciences Inc., a Foster City, Calif.-based biotechnology company that is the world’s biggest maker of AIDS medicines, last year gained U.S. approval of a liver disease drug that may become one of the biggest sellers in history. The company more than doubled in value in 2013.
The Nasdaq Biotechnology Index has gained 18 percent this year as InterMune Inc. more than doubled to lead the advance. The shares of the Brisbane, Calif.-based company soared 171 percent on Feb. 25 after its drug pirfenidone for a fatal lung disease met goals of a study expected to support U.S. approval.
“In an environment where economic growth is relatively scarce, people are willing to pay a higher price for that growth,” James Abate, who oversees about $1 billion as chief investment officer at Centre Asset Management in New York, which owns shares of Gilead but doesn’t have investments in any health-care ETFs. “And health-care companies, by nature of their lack of sensitivity to economic ups and downs, can continue to deliver.”
Pfizer Inc., the world’s biggest drugmaker, has maintained earnings excluding certain items at $2.23 a share in 2010 to $2.22 last year, even as sales fell 23 percent over that period. It has done so by buying back shares and introducing two new potential blockbuster drugs.
“The Pfizers, Mercks and Lillys of the world, those have been doubted for years,” said Tony Scherrer, director of research at Smead Capital Management Inc., referring Merck & Co. and Eli Lilly & Co. “The patent cliff issues are real, but the big pharmas are managing through that really well and they have pipelines that look better than people were thinking,” he said. The fund manages $861 million though it doesn’t have health-care ETF investments.