The iShares Nasdaq Biotechnology ETF (NASDAQGM: IBB), the largest biotech exchange traded fund by assets, is up 20% year-to-date, a solid showing following a rare slump for the biotech sector in 2016. Some market observers believe biotechnology stocks and ETFs can repeat their bullish 2017 performances in 2018.
There are supporters of the biotech space. Healthcare stocks are also showing attractive valuations relative to other defensive sectors, which are richly valued. Biotechnology historically trades at multiples that are elevated relative to broader benchmarks, but after last year’s of struggles for biotechnology names, some analysts see value with some big-name biotech stocks.
Biotech “trades more than 25% below its 15-year average based on historical and forward price-to-earnings ratios. Compared with the broader market, biotech stocks are also trading at a discount and far below their historical average,” according to State Street.
“As FDA works towards accelerating the drug approval process, it is highly unlikely to have a scenario where growing drug approvals and faster turnaround times on Phase trials are met with lower deal activity. The numerous major drug readouts in 2018 will further add to the count of promising and near-approval drugs,” according to a Seeking Alpha biotech analysis.
Biotechnology historically trades at multiples that are elevated relative to broader benchmarks, but after last year’s of struggles for biotechnology names, some analysts see value with some big-name biotech stocks.
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.
Tax reform, should it come to life, is also seen as a potential boon for the healthcare sector, including biotech companies.
“A planned tax break on cash hoarded outside the country can see a meaningful cash infusion into corporate balance sheets. It is estimated that the healthcare sector has over $150 billion in cash held overseas, with large companies like Pfizer (PFE), Merck (MRK), Johnson & Johnson (JNJ), and Amgen (AMGN) accounting for well over $100 billion. However, it must be noted that not all of this overseas cash will be repatriated in case of a sufficiently attractive tax break, and furthermore, based on historical evidence, much of the repatriated cash will find its way into stock buybacks and dividend growth,” according to Seeking Alpha.
The $9.6 billion IBB tracks the Nasdaq Biotechnology Index and holds nearly 160 stocks. Biogen Inc. (NASDAQ: BIIB), Amgen Inc, (NASDAQ: AMGN), Gilead Sciences Corp. (NASDAQ: GILD) and Celegene Inc. (NASDAQ: CELG) combine for over 31% of IBB’s weight.
For more information on the biotech sector, visit our biotechnology category.