Greater Regulatory Scrutiny Could Weigh on Biotech ETFs | ETF Trends

Biotechnology sector-related exchange traded funds could stumble in the near-term as increased regulatory scrutiny weighs on drugmakers.

Among the hardest hit areas of Tuesday, the ALPS Medical Breakthroughs ETF (NYSEArca: SBIO) and SPDR S&P Biotech ETF (NYSEArca: XBI) both decreased 5.8% while the iShares Nasdaq Biotechnology ETF (IBB), the largest biotech-related ETF by assets, fell 3.9%.

SVB Leerink biotechnology analyst, Geoffrey Porges, has issued a rare warning on the biotech segment, with cautious recommendations outweighing the number of companies he sees as buys, Bloomberg reports.

Porges warned that potentially tougher regulatory scrutiny under President Joe Biden’s administration could pressure the sector. Consequently, he downwardly revised recommendations on GlaxoSmithKline Plc, Alexion Pharmaceuticals Inc., MorphoSys AG, Translate Bio Inc., Assembly BioSciences Inc., and Acceleron Pharma Inc. in anticipation of more strict restrictions on pharmaceutical pricing, tougher drug reviews, and greater scrutiny of mergers and acquisitions. The analyst also lowered all to market perform from outperform.

“The industry and its investors will need to adjust to a different regulatory environment to the one they have enjoyed for the last 5 years,” Porges said in a note Tuesday. “Given this overall context, we believe it is advisable to be more selective in our outperform ratings and recommendations, and only expect stocks with clear value-creating events and news to outperform the market and the sector in the coming months.”

The Nasdaq Biotech Index had declined by over 8% from a record high in February, but the benchmark remains about 60% higher over the past year. The biotech and healthcare industry has found support from quick developments in the coronavirus vaccine and an overall positive outlook on growth heavy names.

However, the recent pullback followed several setbacks on new drug applications, which fueled speculation that the U.S. Food and Drug Administration could begin a period of tougher regulatory scrutiny, especially under Democratic leaders, which have long voiced concerns over the high prices of pharmaceutical drugs.

Furthermore, Citigroup Inc. analysts issued a warning over the challenges posed by an international collaboration to overhaul merger and acquisition reviews, along with the views of Xavier Becerra, Biden’s choice to run the Department of Health and Human Services, on mergers and drug pricing.

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