What’s Behind Biotech Gains?

Biotechnology companies comprised 21% of the S&P 500 Health Care Sector index, making it the second largest industry, behind pharmaceuticals (42%), but ahead of health care providers (19%) and health care equipment & suppliers (14%). The industry has been a top performer in recent years, but S&P Capital IQ sees additional catalysts.

Biotechnology was the best performing industry, up 288.5% from 2011-2014, ahead of the S&P Health Care Sector and the broader S&P 1500 indices gains of 118% and 64%, respectively. Year to date through June 19, the 14% gain for industry ahead of the broader market’s 2.9% return.

According to Jeffrey Loo, S&P Capital IQ’s head of health care equity research, there are a number of catalysts. He highlighted that in 2014 several high profile blockbuster drugs were approved by the Federal Drug Administration (FDA) and sales for the seven biotech companies in the S&P 500 index rose 41.5% in 2014, while net income rose 85%. Looking forward, these companies have robust pipelines, with expectations that 10-12 compounds could be approved by the FDA in 2015 and are capable of achieving blockbuster sales in five years.

While the biotechnology industry has strong growth prospects, Loo points out that Amgen (AMGN) and Gilead Sciences (GILD) also pay dividends comparable to other more mature health care companies. S&P 1500 index biotech companies have a 0.8% dividend yield.

Despite the strong gains for the industry the last few years, biotech is far from expensive in our opinion. Indeed, the S&P 1500 Biotechnology industry trades at forward P/Es of 19.1X (2015) and 15.9X (2016), below that of the health care sector’s 19.7X and 16.8X near the broader S&P 1500 index’s 18.5X and 16.1X, respectively.

In the first five months of 2015, investors focused most of their equity ETF assets toward international products. However, among U.S. sector ETFs, diversified health care and biotechnology specific products were highly popular. Health care ETFs gathered $6.7 billion of fresh money.

S&P Capital IQ has rankings and research on more than 800 equity ETFs based on a review of the underlying holdings and key cost factors. In our research, we have found that some biotechnology and health care ETFs are market cap weighted, while others are equally weighted ad provide more exposure to small- and mid-cap companies. We think investors need to understand what’s inside these largely index-based products.

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