Biotech ETFs Surge as Onyx Rejects Amgen Offer

Zacks

Stocks were broadly higher to start the second half of the year as markets rose on strong economic data in a few key segments of the economy. While many market sectors participated in the rally, one corner of the market saw especially solid trading on the day, biotechnology.

This corner of the market saw gains in excess of 3% on the day-- compared to 1.1% gains for the S&P 500—as some attempted acquisition news gave a boost to the broad space. The main catalyst was a report that Onyx Pharmaceuticals (ONXX) was a takeover target of Amgen (AMGN), which looked to buy the company for $120/share.

While this represented a significant premium over the company’s closing price of $86.82/share on Friday, ONXX clearly felt that it wasn’t enough, as the company rejected the offer. The news of the rejection helped to boost the stock in Monday trading though, as ONXX shares were, at time of writing, trading around the $132/share mark, a gain of over 52% for the session.

The news also helped to boost a variety of other companies in the sector as hopes for more merger and acquisition activity in the space. Thanks to this, many smaller biotech companies also saw decent gains, while even some of the larger players in the space were up on the day above what the overall market was seeing for gains.

ETF Impact

The rejection of the takeover was great news for biotech sector ETFs as all of these were up significantly on the day. However, investors should note that due to ONXX’s small size it wasn’t a huge component of many biotech ETFs, accounting for less than 6% of all the products in the space (see Biotechnology ETF Investing 101).

Instead, the main catalyst for the big gains was what the rejection said about the overall state of the biotechnology market. Bigger companies are clearly getting more desperate for new drugs, which could put a variety of small and mid cap firms with decent pipelines into focus, leading many to bid up stocks across the space.

For investors who believe that this trend still has some legs, we have briefly highlighted some of the biggest and most popular biotech ETFs below. Any of these could be decent picks for investors seeking to tap into the positive trends in the space with a lower risk diversified portfolio of biotechnology stocks:

iShares Nasdaq Biotechnology ETF (IBB)

This is the most popular biotech ETF in the space, with just under $3 billion in assets under management. Volume is also solid, coming in at roughly 600,000 shares a day.

The product is cap weighted, so big companies take up a huge chunk of the exposure, although there are about 120 stocks in the ETF. The top holding is actually the in-focus AMGN, while ONXX makes up about 2% of the portfolio (Read 3 Sector ETFs Surviving This Slump).

The ETF is up about 3.7% today, and it is now up about 7.4% over the past five days.

Market Vectors Biotech ETF (BBH)

This ETF tracks the Market Vectors US Listed Biotech 25 Index, holding a small subset of the broad biotechnology sector. The product has decent volume of about 100,000 shares a day, and has assets under management of roughly $300 million.

The ETF is also cap weighted, but because it only holds about two dozen securities, has heavier concentration in the top stocks. GILD and AMGN both take up over 10.5%, although ONXX does find its way into the top ten at 4.5% of the total assets.

BBH added about 5.7% in the session, pushing its five day gain to 9.3%.

PowerShares Dynamic Biotechnology and Genome (PBE)

Another option for investors in the biotech market comes to us from PowerShares and their PBE. This product has somewhat sparse volume of just 20,000 shares a day, but it does have a decent level of assets under management of about $160 million.

The ETF is equal weighted though, so assets are well spread out among component companies. In fact, no one company makes up more than 5.5% of assets, while ONXX accounts for just 2.5% of the fund (also see Could the Small Cap Healthcare ETF Be a Great Pick?).

In terms of performance, PBE has added about 4.5% on the day, pushing its five day gain to just over 7%.

SPDR S&P Biotech ETF (XBI)

The last option on this list is XBI from State Street, a fund that tracks the S&P Biotechnology Select Industry Index. The product has decent volume of about a quarter million shares a day, while its assets under management is also solid at $860 million.

This is also an equal weighted ETF, spreading out assets across roughly 57 firms. No single company accounts for more than 2.5% of the portfolio, and ONXX takes up just 2% of the total portfolio.

The fund is up about 5.4% on the day, while its five day performance comes in at 7.7%.

Bottom Line

Biotechnology has been a strong long term performer, buoyed by a number of positive trends in the space. In particular, there has always been some hope about robust M&A activity taking place, boosting demand for small and mid cap stocks in the space (read Gilead Puts biotech ETFs in Focus).

We may be seeing a new wave of this take place now, as evidenced by the recent news between ONXX and AMGN, and especially since Onyx rejected the lofty bid. This suggests that a big premium will need to be paid on these firms, meaning that the future is increasingly bright for small and mid cap biotechs and the space may be worth buying in ETF form.

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Author is long PBE.

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