Biotech Bounce-Back Could Be Durable | ETF Trends

Following a lengthy wait that included plenty of downside and frustration, biotechnology stocks and exchange traded funds are finding a groove.

For example, the VanEck Vectors Biotech ETF (BBH) is higher by 14.23% since the start of the third quarter. There’s still work to be done as BBH is down 13.64% year-to-date, but recent price action in the biotech equity arena is undoubtedly encouraging.

Interestingly, the recent biotech rally isn’t rooted in fundamentals, which are solid in the group, as much as it is rooted in sentiment. That is to say, more positive headlines are emerging, supporting the upside for BBH and its 25 holdings.

“In a note out Friday, Jefferies analyst Michael Yee drove home the point: Of 16 biotech-sector “events” he tracked in the third quarter, 69% were good news and 31% were bad news. Compare those numbers with second-quarter ones: 38% of 56 events were good news and 62% were bad. The breakdown was even worse in the first quarter, when 26% of 46 events were good, compared with 74% that were bad,” reported Josh Nathan-Kazis for Barron’s.

Delivering punches – good news – is usually positive for companies and investors alike. However, how a company absorbs a punch – bad news – is important, too. To that, BBH and other biotech assets are showing summer temerity this summer.

The much ballyhooed Inflation Reduction Act contains a provision that will allow Medicare to negotiate with biopharma companies on prices for a slew of popular prescription drugs. In theory, that’s not positive for some BBH components, but the fund is standing firm in the wake of that news.

“And potential bad news hasn’t seemed to quash the good summertime vibes. This week, for example, President Joe Biden is planning to sign a significant piece of legislation that includes drug-pricing provisions opposed by the pharmaceutical industry,” according to Barron’s.

In order for BBH’s 25 member firms and the ETF itself to continue rallying into the fourth quarter and year-end, news flow needs to remain positive. Whether it be encouraging Food & Drug Administration (FDA) trial data or approval headlines, elevated shareholder rewards or boosted earnings and sales guidance, headlines that make investors feel good could keep the biotech fire burning over the near-term.

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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.