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Passive perspective: On the mend

Passive perspective: On the mend

‘Drug prices have gone through the roof,’ claimed Donald Trump in October. More recently, however, drug makers’ share prices have gone through the floor.

The Nasdaq Biotechnology index has lost 9.7% since September in sterling terms. It was driven down by concerns about price controls under the Trump administration and by stock-specific issues.

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 after slashing earnings guidance. It has had nearly a third wiped off its value since the start of October and announced it had abandoned trials for a Crohn’s disease treatment on 19 October.

Spoonful of sugar

Amid this anxiety, iShares launched its Nasdaq Biotechnology exchange-traded fund (ETF) in London on 23 October. The US-listed version of the fund has been available since 2001 and holds £7.3 billion of assets.

October’s market correction (the Nasdaq Biotechnology index is still up by 7.2% in sterling terms in 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%. This is lower than 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. However, he accused the industry of ‘getting away with murder’ in January too.

But, in June, the biotech index gained 7.9% in sterling terms on news the White House was preparing friendlier policies. So it is a mistake to presume Trump’s rhetoric will be matched by stringent legislation.

Positive prescription

There are grounds for encouragement at the company level as well. While the market focused on the negatives in October’s updates, both Amgen and Biogen did beat earnings estimates.

Strategists at Bank of America Merrill Lynch noted biotech offers similar long-term growth potential to the surging tech giants. But it trades at half their median price-to-earnings ratios. And it is less of a crowded trade at the moment.

It is perhaps more disappointing, then, 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 25 positions. The S&P Biotech Select Industry index and NYSE Arca Biotechnology index are equal weighted and so have a higher exposure to smaller cap stocks.

iShares also has its £68 million Healthcare Innovation ETF, with a 0.4% TER, which has substantial biotech exposure, including to Alnylam. It has a global mandate, though, with only 44% of the portfolio in the US and 26% in Korea and Japan.

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 delivered positive risk-adjusted returns in the past three years, although the top manager’s information ratio is 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.

 

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