XBI SPDR S&P Biotech

The hot and the soaring biotechnology corner of the broad U.S. healthcare market suffered the steepest decline since October 2011 in Friday’s session. The worst sell-off came after U.S. lawmakers raised concerns on Gilead Sciences (GILD) over the pricing of the new hepatitis C drug – Sovaldi (read: The Guide to Surging Biotech ETFs).

The most-awaited hepatitis C drug received approval in December and costs $1,000 per pill or $84,000 for a 12-week course to treat a hepatitis C patient. Since hepatitis C is most widespread among low-income minority patients, the drug is far too expensive for state Medicaid programs and the patients served by these.

The criticism on Gilead’s drug pricing by private insurers and government healthcare agencies like Medicare and Medicaid has spread fears on the pricing of new drugs by other companies as well. This has led to a risk-off environment, with many investors pulling out capital from this high growth and high beta sector.

The large-cap biotech stocks suffered the most in the broad sector sell-off with Biogen Idec (BIIB) plunging 8%, Gilead down 6%, Celgene (CELG) down 3.7% and Amgen (AMGN) down 3%. This suggests that investors are losing hope in these fast growing companies, which could see rough trading in the coming days.

ETF Impact

The terrible trading in the stock world also sent biotech ETFs space into deep red on the day. In particular, Market Vectors Biotech ETF (BBH), iShares Nasdaq Biotechnology ETF (IBB) and SPDR S&P Biotech ETF (XBI) stole the show, tumbling close to the mid single digits on a single trading day.

Below we profile these ETFs in details and discuss some of the specifics behind their recent slump (see: all the Health care ETFs here):

BBH

This fund tracks the Market Vectors US Listed Biotech 25 Index, holding 26 securities in the basket with a tilt toward large cap and growth stocks. About two-thirds of the portfolio falls under the large cap category while about 80% is classified as growth. The crushed stocks – GILD, AMGN, BIIB and CELG – occupy the top four positions in the basket with a combined 41% of assets.

The product has so far amassed $663 million in its asset base while charging 35 bps in annual fees. BBH fell nearly 5% on the day and saw trading volume of more than 2.5 times than the normal average daily volume.

IBB

This fund provides exposure to 122 firms by tracking the Nasdaq Biotechnology Index. Growth stocks are once again a big part of the portfolio with 76% of the assets while large caps account for 59% share. Four firms that saw the largest decline belong to the top five holdings line-up and collectively make up for nearly 29% of the portfolio.

IBB is the most popular fund is the biotech space with AUM of $5.8 billion and charging 48 bps in fees per year. The ETF dropped about 4.7% on Friday session with elevated volumes of nearly three times the average daily volume.

XBI

This fund follows the S&P Biotechnology Select Industry Index and holds about 71 securities in its basket. Though the ETF puts more focus on small- and micro-cap stocks at 72%, the malaise on drug pricing seems to have crushed small caps too as growth firms still dominate the portfolio at two-thirds (read: Intercept Pharma (ICPT) Pushes SPDR Biotech ETF Ahead of Rivals).

The product has nearly $1.5 billion while charging 35 bps in annual fees. The ETF was down about 4.18% with a volume of more than three times than normal.

Long-term Outlook

Despite this slide, the outlook for the sector is quite promising. The biotech sector and the ETFs are still clearly outpacing the broad market index and the fund from the year-to-date look. In fact, the sector has enjoyed a strong rally over the past five years, gaining more than 250% (read: 5 Best Performing ETFs of the 5 Year Bull Run).

This trend is likely to continue this year thanks to encouraging industry trends, increasing mergers and acquisition activities, expansion into emerging markets, ever-increasing health care spending, insatiable demand for new drugs, aging population and Obamacare.

Further, the three products detailed above have a top Zacks Rank of ‘1’ or ‘2’, suggesting that these will likely outperform the broad market index over a one-year period.

Given the solid long-term outlook but somewhat bearish near-term sentiments, investors may want to consider staying on the sidelines for the time being. However, risk tolerant long-term investors may want to consider this recent slump a buying opportunity, should they have the patience for extreme volatility.

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AMGEN INC (AMGN): Free Stock Analysis Report
 
MKT VEC-BIOTECH (BBH): ETF Research Reports
 
BIOGEN IDEC INC (BIIB): Free Stock Analysis Report
 
CELGENE CORP (CELG): Free Stock Analysis Report
 
GILEAD SCIENCES (GILD): Free Stock Analysis Report
 
ISHARES NDQ BIO (IBB): ETF Research Reports
 
SPDR-SP BIOTECH (XBI): ETF Research Reports
 
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