S&P Capital IQ has released a report tapping three biotech ETFs in a year that’s seen biotech ETFs rank among the best in terms of sector funds performance. This high performance was due largely to frequent FDA approvals and a healthy takeover environment.
“In 2011, the U.S. FDA approved 30 new drugs, compared to 21 in 2010,” S&P said in the note. “Through September 2012, the year-to-date total was 22. We see an improving trend for FDA first cycle review approvals and a rise in the rate of new drug approvals for rare diseases, which we think is helping to boost investor sentiment for the agency, after years of criticism stemming from inconsistency in making and communicating its decisions.”
The ETFs in question are the iShares Nasdaq Biotechnology Index Fund (NASDAQ: IBB), SPDR S&P Biotech ETF (NYSE: XBI), and PowerShares Dynamic Pharmaceuticals Portfolio (NYSE: PJP).
In addition, S&P awarded four-star ratings to Amgen (NASDAQ: AMGN) and Gilead Sciences (NASDAQ: GILD)—two entities that collectively account for more than 16 percent of IBB’s weight and about 12 percent of PJP’s weight.
IBB, the largest biotech ETF with over $2.27 billion in assets, is up over 31 percent year to date. PJP has gained 22 percent, and XBI has also gained 31 percent.
It’s been a good year for biotech takeovers, mergers, and acquisitions; the report pointed to Amylin Pharmaceuticals and Human Genome Sciences as examples, stating that more such transactions should be expected.
Large-cap biotechs, according to the report, have been trading at 18 times the 2012 earnings estimate of late, a number that is lower than the historical average.
IBB, for example, is handsomely valued with a price/earnings ratio of 31.1; PJP rates 13.7.
Nasdaq notes that the report doesn’t mention the First Trust NYSE Arca Biotechnology Index Fund (NYSE: FBT)—a fund that has gained 32.6 percent this year, outperforming IBB, PJP, and XBI. But FBT is somewhat different, in that it holds a mere 20 stocks with a median market value of $4.67 billion. These numbers are much lower than the other ETFs in the report.