By the standard of today’s mega-mergers, a $4 million investment seems like pretty small change
Especially in the $1 trillion global healthcare industry.
You see, Johnson & Johnson Inc. (NYSE: JNJ) recently joined with a private equity firm to invest that “measly” sum in AnTolRx Inc., an early-stage biotech uses targeted nanoparticles to treat a range of illnesses, including autoimmune diseases and diabetes.
Perhaps because the deal is so small, it went completely unnoticed on Wall Street. And that’s fine with us, because here at Strategic Tech Investor we crush the market by getting out in front of the Street.
More to the point, this seemingly small investment speaks volumes about a key tech investing trend that most so-called “analysts” have largely ignored.
I’m talking what I call “Biotech’s Quiet Comeback.” Fact is, four main catalysts have driven this sector upward by 16% in recent weeks.
Today, I’m going to reveal these four major catalysts.
Don’t Tell Anyone About This…
Let’s put the biotech sector’s huge recent gains into some perspective. Since the market hit its post-Brexit bottom on June 27, the bellwether Dow Jones U.S. Biotechnology Index has gained roughly 16%.
That’s more than double the returns we’ve seen from the overall market. The Standard & Poor’s 500 Index has increased by just 7% during the period.
Biotech’s rebound comes after the sector sold off for several reasons last year, falling 31% from late July 2015 through February 2016.
But since then, I have seen four factors at play that account for the sectors quick turnaround. Take a look…
Biotech’s Quiet Comeback Catalyst No. 1: Drug Breakthroughs
Whether it’s the kind of early-stage investments that Johnson & Johnson just made in AnTolRx or late-stage drug pipeline news, the sector is set up to profit from a series of breakthroughs.
Take the case of Keytruda from Merck & Co. Inc. (NYSE: MRK). This drug could turn the tide against cancer by altering how our immune system responds to cancer cells. On Sept. 6, the U.S. Food and Drug Administration said it will consider approving the drug as a first-line defense against lung cancer. That came just a few months after the agency approved it as a second-line defense.
Plus, Sanofi SA (NYSE ADR: SNY) just announced a new diabetes breakthrough in partnership with small-cap Lexicon Pharmaceuticals, Inc. (Nasdaq: LXRX). That news sent shares of Lexicon up 17% – and shares of Sanofi will surely benefit over time as its sales forces peddles this impressive new drug.
A steady supply of new compounds is one of the reasons global drug sales have risen for at least 15 straight years, from $390 billion in 2001 to more than $1 trillion today, according to Statista. And with so many baby boomers heading into old age, that figure may reach $2 trillion by the end of the next decade.
Biotech’s Quiet Comeback Catalyst No. 2: M&A
Investors also profit from a steady stream of deal-making, which often sees small and midsized drug firms acquired at hefty premiums.
Back in February, when its shares were trading for less than $30, Medivation Inc. (Nasdaq: MDVN) began to be talked about as a buyout target.
By the time Pfizer Inc. (NYSE: PFE) announced plans in August to acquire the developer of small molecule cancer drugs for around $14 billion, shares had risen to $80.
Firms like Abbott Laboratories (NYSE: ABT) and AbbVie Inc. (NYSE: ABBV) have each announced deals worth more than $5 billion this year, while we’ve also seen a steady flow of deals in the $1 billion to 2 billion range.
The M&A analysts at Dealogic say there were $250 billion in biopharma deals in 2014 and more than $300 billion last year. When you consider that the biggest drug companies need to constantly reload their drug pipelines, there’s no reason to expect a let-up any time soon.
Biotech’s Quiet Comeback Catalyst No. 3: IPOs
A thriving biotech market makes life easy for investment bankers. They’ve been lining up a series of biotech IPOs, finding high demand for new shares along the way.
Reata Pharmaceuticals Inc. (Nasdaq: RETA), for example, priced its shares in May 2016 at $11, and the developer of anti-inflammatory drugs is already trading close to $30.
Then there’s Editas Medicine (Nasdaq: EDIT), which had peak gains of 228% during the first month in which shares began trading. PAVmed Inc. (Nasdaq: PAVM) went public in late April and went on to have a three-day peak run of 210%.
The IPO experts at Renaissance Capital say that healthcare, which includes biotech and medical devices, accounted for 44% of all new issues in the second quarter. That’s roughly the same as consumer, financial and high-tech IPOs combined.
And a number of other biotech firms have filed the paperwork to go public in the fourth quarter, placing an even brighter spotlight on this sector.
Biotech’s Quiet Comeback No. 4: Politics
As a final catalyst- recall that investors had been bracing for strict drug-price controls if Hillary Clinton won the U.S. presidential election. Stunning price increases for key drugs sold by firms like Valeant Pharmaceuticals International Inc. (NYSE: VRX) and Turing Pharmaceuticals made this industry an easy target for politicians.
Many had expected that if Clinton becomes president she would take a tough line on drug prices. However, those fears are now in the rearview mirror as neither she nor Donald Trump has focused on this top.
Buying the Entire Sector
Put it all together, and that’s strong momentum for Biotech’s Quiet Comeback. And a great way to invest in the entire biotech sector in one move is with the First Trust Arca Biotechnology Index Fund (NYSE Arca: FBT), an exchange-traded fund (ETF).
The fund holds several big-cap leaders, as you’d expect. I’m talking about firms like Regeneron Pharmaceuticals Inc. (Nasdaq: REGN), which focuses on inflammatory and eye diseases, and Celgene Corp. (Nasdaq: CELG), which regulates cells and genes to treat cancer and other diseases.
But one of the things I really like about this ETF is that it also targets lesser known mid- and small-cap firm that are on the cutting edge of biotech. These include…
- Nektar Therapeutics (Nasdaq: NKTR), which has built a unique set of technologies that can modify a substance’s chemical structure.
- Qiagen NV (Nasdaq: QGEN), which sells a broad range of testing equipment that can help extract and purify key molecules found in human tissue and fluids.
- Seattle Genetics Inc. (Nasdaq: SGEN), which has emerged as the drug industry’s leading researcher in a new form of cancer treatment that uses monoclonal antibodies to shrink tumors.
Shares of the FBT trade for roughly $100, less than many of the stocks it holds. It has a three-star rating from Morningstar and a 0.55% expense ratio.
Biotech’s Quiet Comeback has given FBT market-beating gains. Since the market bottomed out Feb. 11, the fund is up 25%, a good deal better than the 15% return for the S&P 500.
FBT truly has the makings of an ETF that is a great foundational play.
It also sets you up to take advantage of a steady stream of new drug breakthroughs that will ensure high growth for years to come.
That’s so good – you may want to keep this one to yourselves.
Have a great weekend.
- Strategic Tech Investor: When It Comes to ETFs, Keep Your Eye on These Three Metrics.