When Innovation and Being Nimble Matters, Turn to this Biotech ETF

The technology sector is often viewed as the epicenter of disruption and innovation, but the healthcare sector isn’t far behind and the ALPS Medical Breakthroughs ETF (SBIO) is one of the preferred ideas for tapping into that trend.

With so many traditional pharmaceuticals makers facing looming patent cliffs, innovation matters more today than it ever has in the healthcare sector and SBIO delivers that innovation. Plus, there’s growth to be had in healthcare.

“We project 4.7% annual average sales growth through 2024 (similar to consensus) for the 18 moatiest pharma and biotech names we cover, as innovation more than counters generic/biosimilar and branded competitive threats,” said Morningstar analyst Damien Conover in a recent note. “Overlaying our growth analysis with valuation, we see underappreciated areas.”

Underscoring its growth tilt, SBIO focuses on small- and mid-cap companies that have one or more drugs in either Phase II or Phase III trials.

All About Innovation

“Innovation is the central building block for the strong economic moats in the drug and biotechnology industry, supporting drug pricing power and launch trajectories,” according to Morningstar. “However, drug sales fall significantly following patent expirations, making the continuous cycle of new drugs essential to the industry’s economic moats.”

Good news for those considering SBIO: the ETF’s components are driving pharmaceuticals innovation and many aren’t in danger of facing near-term patent cliffs.

Another reason SBIO is compelling for long-term investors is that this year, it’s not depending on Coronavirus vaccine news as a primary driver of price action. Likewise, many of its components aren’t dependent on single drug or therapy – diversity that’s often advantageous in the healthcare space.

“Given the pricing pressure overhang, companies need higher levels of innovation in their pipelines to justify pricing and prevent pharmacy benefit managers from using competition to drag prices down,” according to Morningstar. “Slight dosing advantages and minor improvements in efficacy in crowded therapeutic areas will not support the innovation needed for pricing power, as was the case in the 1990s and early 2000s.”

Post-coronavirus, oncology, and immunology – two areas some SBIO components have exposure to – are expected to come back into focus, potentially benefiting the ETF along the way.

Other biotech ETFs include the VanEck Vectors Biotech ETF (BBH), iShares Nasdaq Biotechnology ETF (IBB), and the Virtus LifeSci Biotech Clinical Trials ETF (BBC).

For more on cornerstone strategies, visit our ETF Building Blocks Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.