The iShares Nasdaq Biotechnology ETF (NasdaqGM: IBB), SPDR S&P Biotech ETF (NYSEArca: XBI) and other biotechnology exchange traded funds were punished last year with election year rhetoric widely seen as the primary catalyst behind the sector’s struggles.
Healthcare stocks and ETFs rallied immediately following Republican Donald Trump’s surprising November victory. The impact of a Trump presidency on healthcare stocks remains to be seen. Candidate Trump rebuked Obamacare and if successful in that effort, there would likely be some effect on diversified healthcare ETFs due to their exposure to health insurance providers.
However, new drug approvals, or lack thereof in 2016, weighed on biotechnology ETFs last year. That could change in 2017.
“The number of drug approvals should continue apace. The drop in approvals in 2016 (36) compared to 2015 (41) was due to timing and not a change in FDA criteria. There could be 13 or more approvals by mid-year,” according to a Rodman & Renshaw note.
During the presidential campaigns, biotechnology and pharmaceutical companies like EpiPen allergy shot maker Mylan NV and Valeant Pharmaceuticals International have come under fire over their high drug prices, following Hillary Clinton’s censures.
While Trump was expected to be a proponent to free-market health care, drug company executives and observers warned that the President-elect could scrutinize prices as a populist issue.
“The passage of the 21st Century Cures Act, which enables the accelerated approval of drugs to treat conditions of high unmet need and antibiotics/antifungals under a special pathway, lightens the regulatory burden which, in certain cases, could be significant (e.g., more eteplirsen-type conditional approvals),” notes Rodman & Renshaw.
ETF traders whore are betting big on the biotechnology sector rebound have also utilized leveraged long options. For instance, the Direxion Daily S&P Biotech Bull Shares (NYSEArca: LABU), which takes the 3x or 300% daily performance of the S&P Biotechnology Select Industry Index, surged 81.5% over the past week.
Other options include the ProShares UltraPro Nasdaq Biotechnology (NasdaqGM: UBIO), which takes the 3x daily performance of the Nasdaq Biotechnology Index, and the ProShares Ultra Nasdaq Biotechnology (NasdaqGM: BIB), which takes the 2x performance of the same benchmark.
“M&A should moderate due to valuations and higher interest rates but could perk up if Mr. Trump follows through on his promises to permit the repatriation of offshore cash reserves and reduce corporate income taxes,” according to the Rodman & Renshaw note.
For more information on the biotech sector, visit our biotechnology category.