Believe it or not, the last couple of years have been quiet on the deal-making front in the biotechnology and pharmaceuticals. Combined mergers and acquisitions among biotechnology and pharmaceuticals firms for 2016 and 2017 was just $106 billion, or half the $212 billion seen in 2015, according to Thomson Reuters data.
Good news: Biotech mergers and acquisitions activity is heating up early in 2018. On Jan. 22 alone, French pharma giant Sanofi and U.S. biotech titan Celgene spent a combined $20.6 billion to acquire Bioverativ (Sanofi’s buy) and Juno Therapeutics. Celegene is paying $9 billion to acquire the 90% of Juno it did not already own.
More goods news: Investors are not late to playing the biotech takeover theme and that theme is easily accessible via the ALPS Medical Breakthroughs ETF (SBIO).
Sometimes, Different Is Better
The word “different” often carries a negative connotation in the world of investing. It does not need to and SBIO proves as much. Consider different as it applies to biotech indexes. The NASDAQ Biotechnology Index is a market-value-weighted benchmark while the S&P Biotechnology Select Industry Index is an equal-weighted..
Last year, those widely followed biotech benchmarks returned an average of 32.5%. Sure, the S&P Biotechnology Select Industry Index rose 43.8%, but that still trailed the more than 44% returned by SBIO. SBIO delivered that out-performance with comparable volatility to the S&P Biotechnology Select Industry Index. SBIO thumped the NASDAQ Biotechnology Index by a better than 2-to-1 margin.
Those data points prove index methodology is meaningful when it comes to investors’ outcomes. The Poliwogg[if !supportAnnotations][BD1][endif] Medical Breakthroughs Index (PMBI), SBIO’s underlying index, only holds companies with market values of $200 million to $5 billion. Additionally, member firms must have at least one drug in Phase II or Phase III Food & Drug Administration (FDA) trials.
Putting It All Together
Seasoned biotech investors undoubtedly have plenty of stories to tell about days in which a certain small- or mid-cap biotech stock posted jaw-dropping intraday gains due to takeover headlines. However, identifying takeover targets is not always easy, even for experienced investors. SBIO can ameliorate that burden.
Intuitively, the combination of a market value limit of $5 billion and the FDA Phase II or III requirement set forth by the index mean that at any given moment, SBIO could be home to several potential takeover targets. That is the case today.
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For example, Spark Therapeutics (ONCE) recently got an approval for a gene therapy for blindness. A company of Spark’s size and limited scope could find better opportunity with this drug by positioning the firm for a sale to a bigger biotech or pharma player.
Then there is Tesaro (TSRO), an emerging leader in the PARP inhibitor space. PARP inhibitors can keep cancer cells from spreading, meaning pharma majors need these treatments in their portfolios. That makes Tesaro a potential takeover candidate.
Galapagos (GLPG) has a drug in late-stage trials called filgotinib for rheumatoid arthritis and Crohn’s disease. The company has a partnership with Gilead Sciences (GILD). Not surprisingly, speculation is swirling that Gilead will make a move on Galapagos.
Portola (PTLA) previously landed an approval for an anti-coagulant treatment, one that the company is attempting to expand and it is expected that the FDA will grant that expansion. The anti-coagulant arena is fiercely competitive and that could be a sign that if the FDA grants the expansion of the Portola treatment, the company could be acquired.
As of Jan. 19th, Galapagos, Tesaro and Portola were three of the top 11 holdings in SBIO.
An investor should consider the investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus which contain this and other information call 866.675.2639 or visit www.alpsfunds.com. Read the prospectus carefully before investing.
ALPS Medical Breakthroughs ETF shares are not individually redeemable. Investors buy and sell shares of the ALPS Medical Breakthroughs ETF on a secondary market. Only market makers or “authorized participants” may trade directly with the Fund, typically in blocks of 50,000 shares.
ALPS Advisors, Inc. (AAI) has engaged IRIS Werks, LLC (IRIS) to produce analysis and commentary on ALPS-advised ETFs. IRIS currently has a compensated business relationship with AAI. AAI is not affiliated with IRIS.
The content and opinions expressed in this article are that of the author and not the views and opinions of AAI. In addition, AAI assumes no responsibility to ensure the accuracy of the content written by the author.
There are risks involved with investing in ETFs including the loss of money. Additional information regarding the risks of this investment is available in the prospectus. Past Performance is not indicative of future results.
ALPS Portfolio Solutions Distributor, Inc. is the distributor for the ALPS Medical Breakthroughs ETF. AAI is affiliated with ALPS Portfolio Solutions Distributor, Inc.
The author is not an investment professional and this article should not be considered investment advice. While the information and statistical data contained herein are based on sources believed to be reliable, the author takes no responsibility to ensure the accuracy of the content. Additionally, this article should not be relied on or be the basis for an investment decision. Information that is historical is not indicative of future results, and subject to change.
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