Now that the political overhang on the markets has more or less abated, biotechnology stocks and sector-related exchange traded funds could enjoy more favorable conditions under a Donald Trump presidency.
On the recent webcast (available on-demand for CE Credit), Will Trump Make Biotechnology Great Again?, Paul Yook, Founder of LifeSci Index Partners, and Co-Portfolio Manager of the BioShares funds, pointed out that the outlook for the biotech sector has dramatically changed after Trump’s victory, along with Republicans taking the majority in Congress and the failed California referendum Proposition 61 relating to lower drug prices.
Moreover, the biotechnology sector is rebounding on diminishing concerns over Hillary Clinton’s critiques on the drug pricing and potential hit to profitability.
Andrew McDonald, CEO of LifeSci Advisors and Co-Portfolio Manager of the BioShares funds, believes Trump could make biotech great again as a Trump administration could assuage fears of ending the Affordable Care Act and instead replace Obamacare with an improved plan.
Looking beyond the politics and potential government influence on the healthcare and biotech space, Yook also pointed out that biotechnology stocks have experienced their largest retrenchment in over a decade and are now trading at very attractive valuations. For instance, the Bloomberg Mature Biotech Index is trading at a near 10-year low price-to-earnings ratio of 12x, compared to the 18x for the S&P 500 index.
Along with the cheap valuations, biotech companies still offer attractive long-term growth potential. Biotech is the fastest growing segment in the healthcare sector, McDonald said. Breakthrough drug discoveries and blockbuster drugs in debilitating diseases will continue to support growth.
In a survey of financial advisors attending the webcast, 48% of respondents believe biotech could increase over 10% in 2017 while 42% believe biotech could rise between 2% and 10% next year. Half of the advisors also indicated that they plan on increasing their biotech exposure over the next twelve months while 38% may maintain positions.
The overall healthcare sector remains robust and continues to expand, growing 7.2% annually between 1990 and 2008. As a percentage of U.S. gross domestic product, healthcare spending still leads the world at 17.1% in 2013.
As a way to capitalize on the growth in the biotech space, investors can take a look at the targeted BioShares Biotechnology Clinical Trials Fund (NasdaqGM: BBC), which is comprised of up-and-coming biotechnology companies that are in the clinical trials stage with no product sales.
An ETF approach to biotech stocks in the clinical trials stage may help investors diversify into industry and could provide a better way to access potential blockbuster drug makers. Yook noted that only 1 in 30 leads eventually become FDA approved at an average cost of close to $1 billion in 13 years. Consequently, it may be more prudent for investors to track a basket of biotech companies as opposed to picking a few names in hopes of striking it big.
Additionally, investors can take a look at the BioShares Biotechnology Products Fund (NasdaqGM: BBP), which follows U.S.-listed biotech companies with a primary product offering or product candidate that has landed FDA approval. Since BBP focuses on larger biotech companies with driving sales, this fund may show lower volatility, compared to BBC that targets smaller, more volatile company stocks.
Financial advisors who are interested in learning more about the biotech space can watch the webcast here on demand.