Large cap biotechnology companies are flush with cash, and they’re on the prowl for takeover targets, a scenario that could bode well for the ALPS Medical Breakthroughs ETF (SBIO).

SBIO focuses on small- and mid-cap companies that have one or more drugs in either Phase II or Phase III trials. The component holdings have one or more drugs in either Phase II or Phase III U.S. Food and Drug Administration clinical trials. In a Phase II trial, the drug is administered to a group of 100-300 people to see if it is effective and to evaluate its safety. In a Phase III trial, the drug is given to a larger group, between 500-3,000 people, to confirm its effectiveness, monitor side effects, compare it to commonly used treatments, and collect information that will allow the drug or treatment to be used safely.

“The first two weeks of the year already produced four large tie-ups in health care, and the JPMorgan Healthcare Conference, which kicked off Monday, has typically lent itself to deal news. Wall Street’s anticipation comes as a bevy of heavyweights need to refill their portfolios ahead of expiring patents and emerging competition,” reports Baily Lipschultz for Bloomberg.

Why SBIO Matters Right Now

SBIO is one of the original exchange traded funds dedicated to small- and mid-cap biotechnology stocks. Alone, that trait enhances the fund’s relevance in a brisk takeover environment, but there’s more to the story.

SBIO is frequently home to credible takeover targets because its components must have drugs in Phase II or Phase III trials and the its holdings must have enough cash to survive at least two years at current burn rates. Either of those traits or a combination of the two make for alluring investment opportunities.

SBIO 1 Year Performance

“Biotech mergers should pick up steam this year as cash-rich companies whose shares stumbled through 2020 — like Amgen Inc. and Gilead Sciences Inc. — look to replenish wavering pipelines,” adds Bloomberg.

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

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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.