‘Drug prices have gone through the roof,’ claimed Donald Trump earlier in October. More recently, however, drug makers’ share prices have gone through the floor.
The Nasdaq Biotechnology index lost 6.5% in October, driven down not only by concerns about price controls under the Trump administration but by stock-specific issues too.
The index’s largest constituent, Amgen, for example dipped by 2% after reporting weak sales on 25 October. Biogen, the second-largest member of the index, also dropped by 9% the same week due to concerns about softening demand for its key products.
Celgene, another major biotech group, fared even more poorly, plunging by 19% last week after slashing its earnings guidance. It has now had a third wiped off its value over the past month, having announced that it had abandoned trials for a Crohn’s disease treatment on 19 October.
Amid this anxiety, iShares launched its Nasdaq Biotechnology ETF in London on 23 October. The US-listed version of the fund has been available since 2001, and contains £7.3 billion.
October’s correction in the market – the Nasdaq Biotechnology index is still up by 20% over the past year – is not the only sense in which the new ETF makes biotech cheaper.
The iShares fund has a total expense ratio of 0.35%, lower than both the 0.47% cost of the US equivalent and the 0.4% fees for the only other UK-listed biotech ETF, the £292 million Source Nasdaq Biotech fund.
Pessimism around the sector may also be excessive. Trump admittedly sounded hostile in October. ‘The drug companies, frankly, are getting away with murder and we want to bring our prices down to what other countries are paying,’ he said. He had accused the industry of ‘getting away with murder’ in January too.
But in June the biotech index gained 13% on news that the White House was preparing friendlier policies, including speeding the approval process for new drugs and obliging other countries to pay more for pharmaceuticals. It is a mistake, in other words, to presume that Trump’s rhetoric will be matched by stringent legislation.
There are grounds for encouragement at the company level as well. While the market focused on the negatives in last week’s updates, both Amgen and Biogen did beat earnings estimates.
Strategists at Bank of America Merrill Lynch have noted that biotech offers similar long-term growth potential to the surging tech giants, but trades at half their median price-to-earnings ratios and is furthermore less of a crowded trade at the moment.
A bare armamentarium
It is perhaps more disappointing, then, that the only two UK-listed biotech ETFs track the same index when there are other benchmarks.
The MVIS US Listed Biotech 25 Index is a more concentrated option, with just the titular 25 positions to the 160 in the Nasdaq.
The S&P Biotech Select Industry index is equal weighted and so has a higher exposure to smaller-cap stocks: its largest holding is Alnylam Pharmaceuticals with a market capitalisation of £8.4 billion, compared with Amgen’s £97 billion. The NYSE Arca Biotechnology index is likewise equal weighted.
iShares also has its £68 million Healthcare Innovation ETF, with a total expense ratio 0.4%, which has substantial biotech exposure, including to Alnylam. It has a global mandate, though, with only 44% of the portfolio in the US; 26% is in Korea and Japan.
This diversification has been rewarded recently, of course. Healthcare Innovation has returned 23.5% over the past year, ahead of the Nasdaq Biotechnology index, having lagged it by 24% to 31% until US biotech’s slide began in early October.
Then there is the suite of popular active vehicles for biotech allocations, although their performance has been mixed. In the small open-ended peer group, only half the funds have delivered positive risk-adjusted returns over the past three years – albeit with the top manager’s information ratio a highly impressive 1.14.
The two investment trusts specialising in biotech, on the other hand, have comfortably beaten the Nasdaq Biotechnology index over three, five, and 10-year periods.