Healthcare Business

ETF Watch: Biotechs Fighting M&A Shrinkage (BBH, AMGN, GILD, BIIB, XBI, FBT, CRA, CEPH, IBB)

Jon C. Ogg

Biotech is becoming the ever-shrinking stock sector.  It is almost weekly now that a new biotech acquisition is announced.  Big Pharma in the United States and large drugmakers internationally are all interested in acquiring the next latest and greatest pipeline products for cancer, MS, and on and on.  What is so interesting is that there is becoming nearly a Noman’s Land in the real mid-cap sector in biotech.  It is this merger activity that is perhaps the largest single driving force behind the rise in biotech ETFs.

Biotech HOLDRs (NYSE: BBH) is the oldest biotech ETF and its shares hit a multi-year high of $107.75 today.  That is up more than 25% from the lows of last summer.  Amgen Inc. (NASDAQ: AMGN), Gilead Sciences, Inc. (NASDAQ: GILD), and Biogen Idec Inc. (NASDAQ: BIIB) now equate to right at 85% of the entire Biotech HOLDRs.  Genentech and Genzyme are now not there to counterbalance the ETF with large weightings.

SPDR S&P Biotech ETF (NYSE: XBI) avoids this as it has more companies in the underlying ETF but it too runs the risk that many of the mid-cap constituents are being acquired.  This one has not hit a year-high today, but its shares are up more than 35% from the lows of last summer.

First Trust NYSE Arca Biotechnology Index Fund (NYSE: FBT) has a more diversified holdings base as well, but its weighting is over 6% in Celera Corporation (NYSE: CRA) (already in a deal) and just under 6% in Cephalon Inc. (NASDAQ: CEPH) with a status pending on whether or it stays independent or merges.  Soo far it has yet to take out a 52-week high but even by a closer margin than the “XBI” above.  This one is up nearly 40% from the lows of last summer.

iShares NASDAQ Biotechnology (NASDAQ: IBB) also came well within 1% of a 52-week high yet again today, with its shares up about 35% of last summer’s lows.  If you are looking for a biotech ETF with the least disruptive impact by the M&A waves in the sector this one (at least currently) appears to be the least dented by M&A.  That may change but that is noted solely ‘just in case.’

Obviously not every single biotech will be acquired.  That is not the point.  What is important to watch is how the continued trend of mergers is changing the weighting of each of these ETFs.  If these weightings change too much it can impact how each of these trade.