Significant Phenomena Materializing for US Biotech ETFs
The author is an analyst of NH Investment & Securities. He can be reached at pk.park@nhqv.co. -- Ed.
In 2021, New York Stock Exchange pharmaceuticals indices have proved solid, backed by strong profit generation at large pharmas that have benefited from Covid-19. Meanwhile, returns have come in weak for ETFs providing exposure to pure biotech plays, such as XBI and ARKG. We believe that the decoupling of Covid-19 sentiment from biotech share prices is a signal of bio industry recovery.
New York Stock Exchange pharmaceuticals/bio indices have performed solidly in 2021
YTD returns for the S&P500 Healthcare and Dow Jones US Pharmaceuticals indices, the leading pharmaceuticals/bio indices of the New York Stock Exchange, stand at +15.2% and +11.5%, respectively. YTD returns for the Nasdaq Biotech Index (NBI) amount to -2.9%, somewhat underperforming the S&P and Dow but appearing solid compared to the Kospi Pharmaceuticals Index (-17.4%) and Kosdaq Pharmaceuticals Index (-22.2%). We attribute the healthy performance of the New York Stock Exchange pharmaceuticals indices—despite the contraction in clinical trials and deals—to global pharmas’ substantial contributions to the fight against Covid-19. This year, the NBI has been led by Moderna and BioNTech.
Significant phenomena materializing for US biotech ETFs
US biotech ETFs can be broadly classified into two categories: 1) those that are largely focused on Moderna and BioNTech; and 2) general biotech ETFs. YTD returns of the top three biotech ETFs, IBB, XBI, and ARKG, come to +0.0%, -18.6%, and -34.2%, respectively. While shares of Moderna make up the largest portion (8.5%) of IBB, no Covid-19-related plays appear in the top-10 holdings of XBI or ARKG. In other words, general new drug developers that are unrelated to Covid-19 (ie, pure biotech plays) have delivered weak returns as of late, both in Korea and globally.
Rise of general biotech ETFs such as XBI could signal rebound
Big pharmas have been the main beneficiaries of Covid-19. At home, such firms include Samsung Biologics and SK Bioscience (SKBS). Accordingly, at times of worsening sentiment towards Covid-19-related companies, related large-cap stocks correct, dragging down both pharma/bio indices as well as the share prices of pure biotech plays. Although volatility has been increasing due to the Omicron mutation, in the end, biotech share prices should recover from the impacts of Covid-19 on a normalization of clinical trials and deals. In 2020, bio-related funding amounted to US$250bn (+50% y-y), a record high. If general biotech ETFs such as XBI and ARKG rebound, we expect the bio industry to log an outstanding performance in 2022. As 2022 top picks, we recommend Yuhan and T&R Biofab.