Surprising Value in Big Biotech ETFs

Rare are the occasions that biotechnology stocks and exchange traded funds are seen as offering value. In fact, the sector historically trades at multiples that are elevated relative to broader benchmarks, but in a year of struggles for biotechnology names, some analysts see value with some big-name biotech stocks.

The biotechnology sector has been among this year’s worst performing areas of the market as investors shifted out of high-flying growth stocks in face of increasing market uncertainties for more value plays.

However, a potential catalyst for biotech stocks and ETFs looms as traders that previously heavily shorted some of these names move to take profits and cover these winning bearish bets.

Related: Biotech ETFs Reeling in Longest Sector Selloff in Two Decades

“The Recent P/E Multiple Compression was Exacerbated by the Sector Sell-Off of the Last 12 Months, and Has Been Compounded by the Growing Denominator of Still Strong Forward Consensus Revenue and Earnings Estimates,” according to part of a Leerink note posted by Ben Levisohn of Barron’s. “Much of the near term growth comes from established brands that seem likely to prove very durable to us, with pricing power, growing demand, limited or manageable competitive challenges and new indications, geographies and formulations to sustain revenue and cash flow beyond the implied mean reversion of today’s multiples.”


The Leerink analysts highlighted large-cap biotech names as trading at discounts compared to long-term averages, noting “large cap biotech is -30% off the mean multiple of 20.6X for the period of Jan 2002 – present.”