The iShares Nasdaq Biotechnology ETF (NasdaqGM: IBB), the largest biotechnology exchange traded fund by assets, is up more than 10% year-to-date and some analysts believe some of the ETF’s marquee holdings have rebound potential, a scenario that could further boost IBB.
IBB, which holds nearly 190 stocks and is a cap-weighted ETF, has a price-to-earnings ratio of just over 21 and a price-to-book ratio of 4.92. The ETF’s three-year standard deviation is just over 25 percent.
Market observers are growing more bullish on the sector as a Republican-led Congress and administration could enact reforms to free cash held overseas for tax reason by large U.S. pharmaceutical companies, which could pave the way for increased acquisitions in the sector. The White House is also looking to help the Food and Drug Administration (FDA) expedite new drug approvals, which could serve as a major catalyst for the biotechnology space.
“Besides what are they going to buy, our most popular Gilead (ticker: GILD) conversation is how to think about the worst case. Our Grey Sky valuation is $58 a share (13% downside from current market price) versus a Blue Sky scenario if we had greater visibility into their pipeline of $85 a share (25% upside from current market price),” according to a Credit Suisse note posted by Barron’s.
Gilead is 7.7% of IBB’s weight, making it the second-largest of the ETF’s 162 holdings. Celegene (NASDAQ: CELG) is the ETF’s largest holding.
Political risks linger for biotechnology stocks and the broader healthcare space. President Trump recently said that pharmaceuticals prices in the U.S. are “outrageous.” Earlier this year, Trump said the pharmaceuticals companies “are getting away with murder” when it comes to pricing on their products.
“Although the company is now viewed as a show-me story for investors, we think Alexion (ALXN) shares are pretty close to reflecting a worst-case scenario for the company long-term,” said Credit Suisse in the note posted on Barron’s. “Our Grey Sky scenario of $101 a share assumes 2025 revenue of $3.5 billion versus 2017 revenue of $3.6 billion (about 0% growth).”
Alexion is IBB’s ninth-largest holding at a weight of almost 3.7%.
For more information on the biotech sector, visit our biotechnology category.