This past year was a largely forgettable one for the biotech sector. The 10 largest biotech firms in the Nasdaq Biotechnology Index, for example. saw roughly $115 billion of their collective market value wiped out. All 10 of them fell in value in 2016.
Blame goes to politics. “The sector began to sell-off early in the year, as Hillary Clinton started to speak about the possible need for drug price controls,” says Ryan Issakainen, ETF strategist at First Trust Advisors. That led many investors to question their basic assumptions about biotech sector profit growth. Full pricing for patent-protected drugs is a key source of profits for biotech firms to fund their innovation engines.
Despite such concerns, it’s worth noting that nine of the 10 largest biotech firms are expected to show rising profits in 2017, with nearly 15 percent growth on an aggregated basis.
Still, the emerging strains associated with the Affordable Care Act, and the likelihood that it will be altered or repealed, has created investor uncertainty for all healthcare-related stocks. Furthermore, President-elect Donald Trump recently tweeted his concerns about drug prices, but it remains to be seen whether that is mere off-the-cuff rhetoric or a harbinger of actual policy moves.
We do know that biotechs are expected to benefit from a set of short-term and long-term factors. First, the incoming presidential administration is expected to appoint a new head of the Food & Drug Administration that takes a less restrictive view of regulation. That could spell faster approval times for key drug applications.
“The sooner a drug can get to market, the longer you have monopoly control over pricing,” Issakainen says, adding that the regulatory regime is hugely important for biotechs. There has been mention that former venture capitalist Jim O'Neill, who has advocated for relaxing FDA regulations for drug approvals, could be named to lead the agency.
Looking beyond 2017, demographics are a key reason to invest in biotechs. There are currently 901 million people worldwide aged 60 and older, which tends to mark the phase of life when many people up their use of prescription drugs. That cohort is expected to swell to 2.1 billion people by 2150, according to Merrill Lynch.
ETF Choices
After the 2016 sell-off, investors can boost exposure to this beleaguered sector through a variety of industry-related ETFs. This article focuses on three leading funds, with each taking a different approach.
If you want exposure to the biotech sector’s most established firms, there's the iShares Nasdaq Biotechnology ETF (IBB) that has nearly two-thirds of its assets invested in large-cap stocks. Due to a market-weighting approach, this fund tends to concentrate its bets: its top five positions account for around 40 percent of the portfolio