Traditionally, October has been a weak month for stocks. However, so far this year, biotech stocks have shown significant resilience, with iShares Nasdaq Biotechnology ETF (IBB) gaining 11.5% year to date (YTD). Additionally, the broader Health Care Select Sector SPDR ETF (XLV) has risen 15.1% YTD, better than the S&P 500’s increase of 9% during the same period.
Health problems like nonalcoholic steatohepatitis (NASH) and food allergies are expected to keep drug manufacturers busy in the coming months. Moreover, successful drug trials at several biopharmas and FDA approvals are going to benefit drug makers. Given the present circumstances, biotech companies appear promising bets for October.
NASH, Food Allergies to Bring Significant Gains for Drugmakers
Countries like the United States that have a fatty diet range of 5% to 20% are expected to be more affected by NASH, per a Reuters report. It is projected to create a market of around $20 billion to $35 billion in the next two years. In fact, in the United States alone, 15 million people are projected to suffer from NASH, which, in turn, will benefit biopharmaceutical companies developing treatments for this indication.
Additionally, life-threatening food allergies are a concern in the United States. According to Centers for Disease Control and Prevention, from 1997 to 2016, severe allergic reactions like anaphylaxis jumped 70% in kids aged less than 18 years in the United States. Per a study by FAIR Health, in the United States, private insurance claims related to the diagnoses of anaphylaxis soared 377% from 2007 to 2016.
A Few Key Updates
Alexion Pharmaceuticals, Inc. ALXN announced that the phase III study, PREVENT, on its lead drug Soliris was successful. Data showed that treatment with Soliris reduced the risk of neuromyelitis optica spectrum disorder relapse by 94.2% compared to placebo. Gilead GILD announced that it plans to launch authorized generic versions of its leading hepatitis C virus treatments — Epclusa and Harvoni.
The FDA lifted the clinical hold for Sarepta Therapeutics, Inc’s SRPT Duchenne muscular dystrophy micro-dystrophin gene therapy program.Separately, Sarepta expects the European Commission to adopt the Committee for Medicinal Products for Human Use’s opinion by year-end 2018.
Amarin Corporation plc AMRN reported positive top-line results from the cardiovascular outcomes trial, REDUCE-IT on Vascepa, which is derived from fish oil. The FDA issued a clear statement reaffirming the positive benefit-risk profile of ACADIA Pharmaceuticals Inc’s ACAD Nuplazid for patients with Parkinson’s disease psychosis.
Biotech Stocks on Strong Footing
The Zacks Medical - Drugs industry, part of the broader Zacks Medical Sector, has outperformed its own sector over the past year. While the stocks in this industry have collectively gained 9.3%, the Zacks Medical Sector has rallied 8.6%.
Also, the industry currently carries a Zacks Industry Rank #102, which places it in the top 40% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
On the earnings front, out of the 155 companies in the Zacks Medical - Drugs Industry, 128 reported earnings for the second quarter. Out of the 128, 64 delivered earnings beat while 13 managed to meet the consensus estimate. According to Morningstar, healthcare mutual funds have posted year-to-date and one-year returns of 18.6% and 19.2%, respectively.
Top 5 Healthcare Mutual Funds
The aforementioned bullish factors call for investing in healthcare funds. In this context we have selected five strong performing healthcare mutual funds. These funds have generated impressive returns in the year-to-date (YTD) period. These funds boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), require a minimum initial investment within $5,000 and carry a low expense ratio.
We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance but also on the likely future success of the fund.
Fidelity Select Medical Equipment and Systems Portfolio FSMEX invests the bulk of its assets in securities of companies that focus on research, development, manufacture, distribution, supply, or sale of medical equipment and devices and related technologies. The fund invests in securities of U.S. and non-U.S. companies.
The fund has generated YTD returns of 30.7% and has an expense ratio of 0.75% compared with the category average of 1.41%. FSMEX has a Zacks Mutual Fund Rank #1.
Franklin Biotechnology Discovery A FBDIX invests the majority of its assets in securities of companies from the biotechnology domain. The non-diversified fund may invest a maximum of one-fifth of its assets in equities as well as debt securities of U.S. and non-U.S. biotech companies.
The fund has returned 10.2% YTD and has an expense ratio of 1.02% compared with the category average of 1.41%. FBDIX has a Zacks Mutual Fund Rank #2.
T. Rowe Price Health Sciences PRHSX invests the major portion of its net assets in common stocks of companies involved in research, development, production, or distribution of products or services related to health care and life sciences. PRHSX may invest in companies of any size but focuses on investing in large and mid-cap companies.
The fund has generated YTD returns of 18.8% and has an expense ratio of 0.77% compared with the category average of 1.41%. PRHSX has a Zacks Mutual Fund Rank #2.
Delaware Healthcare A DLHAX seeks long-term capital growth. DLHAX invests a large part of its assets in the equity securities of healthcare companies. These companies produce and distribute products that are required in medical industries.
The fund has returned 16.6% YTD and has an expense ratio of 1.31% compared with the category average of 1.41%. DLHAX has a Zacks Mutual Fund Rank #2.
Fidelity Advisor Health Care Fund A FACDX seeks appreciation of capital. FACDX invests in securities issued by companies engaged in the design, production and sale of products or services used in the healthcare sector. The fund normally invests in both U.S. as well as non-U.S. companies.
The fund has generated YTD returns of 25% and has an expense ratio of 1.04% compared with the category average of 1.41%. FACDX has a Zacks Mutual Fund Rank #2.
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