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Biotech ETFs Jump on Roche-Spark Deal

Sweta Killa

After a brief period of lull, the healthcare space is witnessing a wave of mergers and acquisitions. This is especially true as Swiss pharma giant Roche Holdings RHHBY has bet big on U.S.-based gene therapy company Spark Therapeutics ONCE in an effort to strengthen its presence in gene therapy.

The Swiss drugmaker has agreed to acquire Spark for $114.50 per share in all-cash transaction or total equity value of about $4.8 billion. The per-share price represents massive premium of 122% to Spark’s closing price on Feb 22 and a premium of 19% to its 52-week high price on Jul 9, 2018 (read: Despite M&A Spree, Biotech ETFs Slide on Mixed Earnings).

Under the terms of the deal, Roche will promptly commence a tender offer to acquire all outstanding shares of Spark common stock. Also, Spark will file a recommendation statement containing the unanimous recommendation of its board that Spark shareholders tender their shares to Roche.

The acquisition will bolster Roche’s presence in treating hemophilia, which already offers Hemlibra, a drug that treats a rare disorder that stops blood from clotting normally. It will give Roche access to Luxturna, the first gene therapy approved in the United States. Luxturna treats a rare disorder that often leads to blindness. The transaction will also provide competitive edge over its rival Novartis AG NVS in developing the promising and new area of medicine.

The deal, expected to close in the second quarter of 2019, has been unanimously approved by the boards of Spark and Roche, and is awaiting approval from regulators.

Market Impact

Following the announcement of the merger, shares of Spark skyrocketed more than 120% to close the day and crushed its average volume as nearly 16.2 million shares moved hands compared with 532,000 on average. Meanwhile, shares of Roche slid 0.4% (read: Best & Worst Performing ETFs to Start 2019).

The news has triggered speculations of merger wave in the gene therapy industry and the resultant rally. As a result, other gene therapy biotech stocks also surged. Notably, UniQure QURE jumped 34.3%, CRISPR Therapeutics AG CRSP climbed 25.2%, bluebird bio inc. BLUE rose 14.2%, Audentes Therapeutics BOLD gained 11.4% and Solid Biosciences SLDB was up 9.6%.

The solid trading has pushed the biotech ETFs higher as well. Invesco Dynamic Biotechnology & Genome ETF PBE stole the show, climbing 5.3%. This was followed by gains of 4.4% for SPDR S&P Biotech ETF XBI, 3.5% forARK Genomic Revolution Multi-Sector ETF ARKG and 3.4% for ALPS Medical Breakthroughs ETF SBIO.

Below we profile these ETFs in details and discuss some of the specifics behind their rally (see: all the Healthcare ETFs here):

PBE

This fund provides exposure to 29 firms by tracking the Dynamic Biotech & Genome Intellidex Index. It has managed $267.3 million in its asset base while trades in modest volume of 38,000 shares per day. Expense ratio comes in at 0.59%. The product has a Zacks ETF Rank #2 (Buy) with a High risk outlook.

XBI

With AUM of $4.1 billion, XBI provides equal-weight exposure across 118 stocks by tracking the S&P Biotechnology Select Industry Index. XBI has 0.35% in expense ratio and trades in an average daily volume of 5.5 million shares. It has a Zacks ETF Rank #2 with a High risk outlook (read: Best-Performing ETFs of January).

ARKG

This is an actively managed ETF focusing on companies that are expected to benefit from extension and enhancement of the quality of human and other life by incorporating technological and scientific developments, improvements and advancements in genomics into their business. The fund holds 33 stocks in its basket and has 0.75% in expense ratio. It has accumulated $321.3 million in its asset base and trades in average daily volume of 154,000 shares.

SBIO

This is a small-cap centric fund targeting biotech sector. It provides exposure to 71 companies with one or more drugs in Phase II or Phase III FDA clinical trials by tracking the Poliwogg Medical Breakthroughs Index. The product charges 50 basis points in fees per year from investors and trades in a moderate average daily volume of about 68,000 shares. It has AUM of $185.8 million in its asset base and has a Zacks ETF Rank #2 with a High risk outlook (read: Small Caps Taking Charge of the Bulls: 6 ETF Winners YTD).

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