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Biotech ETFs Surge on InterMune-Roche Deal

InterMune (ITMN) was a star performer in Monday trading session, as the stock skyrocketed more than a third on the day. The massive gain for this biotech firm came after the Swiss drug maker Roche Holding (RHHBY) agreed to buy InterMune for $8.3 billion.

As per the deal, Roche will pay $74 per share in cash, which represents 38% premium to the ITMN closing price as of August 22 and 63% premium to the price on August 12 when the potential takeover of InterMune was initiated. The deal is expected to close by the year end (read: A Comprehensive Guide to Biotech ETFs).

The acquisition would broaden and strengthen Roche’s portfolio of medicines for respiratory ailments. The most promising new drug is pirfenidone, which is used for the treatment of a progressive and ultimately fatal scarring condition of the lungs. Pirfenidone is already approved for idiopathic pulmonary fibrosis (IPF) in Europe and Canada, and is currently under regulatory scrutiny in the U.S.

About 70,000 to 200,000 Americans suffer from IPF, according to the various sources. The disease has no known cause. Scaring starts in the lungs, and patients eventually lose the ability of breathing. Death often occurs two to five years after diagnosis.

Given this, Pirfenidone would be the first drug in the U.S. for a rare lung disease and could act as a lifesaver. The approval of the drug is expected by November 23. Roche, the world’s largest maker of cancer drugs, expects the takeover to boost earnings from 2016.

Market Impact

InterMune’s acquisition by Roche was well received by investors and the stock added more than $19 per share on the day to close at record high of above the $73 per share mark. The stock crushed its average volume figures, as nearly 51.5 million shares moved hands compared to just 2.8 million on average (read: Healthcare ETFs Leading the Pack This Q2 Earnings).

The news led to a surge in the broad biotech ETF space on the day. First Trust NYSE Arca Biotechnology Index Fund (FBT) led the way higher gaining 4.2%, followed by gains of 3.2% for SPDR S&P Biotech ETF (XBI) and 2.9% for PowerShares Dynamic Biotechnology & Genome Portfolio (PBE). In fact, FBT is the top non-leveraged performing fund of the day.

FBT in Focus

This fund follows the NYSE Arca Biotechnology Index and holds about 20 securities in its basket. Of these firms, ITMN takes the top spot with 5.95% of assets. The ETF is spread across various market caps – 39% in large caps, 34% in small caps and the rest in mid caps with a tilt toward growth stocks at 79%. The fund manages a $1.4 billion in its asset base and charges 60 bps in annual fees. Average daily volume is good as it exchanges 174,000 shares a day (read: Last Week's ETF Highlights: MLP and Biotech Funds Soar, Volatility Sinks).

XBI in Focus

This fund follows the S&P Biotechnology Select Industry Index and holds about 80 securities in its basket. It is well spread out across its components with InterMune having 1.54% share and holding the eight position. The ETF puts more focus on small- and micro-cap stocks at 71%, while mid and large caps account for the rest. The product has nearly $1.1 billion in AUM and sees solid volume of 659,000 shares per day. It charges 35 bps in annual fees.

PBE in Focus

This fund provides exposure to 29 firms by tracking the Dynamic Biotech & Genome Intellidex Index. ITMN occupies the ninth position with 4.57% allocation. The ETF is spread across various market caps – 31% in large caps, 25% in mid caps and the rest in small caps. The product has amassed $386.6 million in its asset base while trades in lower volume of 96,000 shares per day. Expense ratio came in at 0.63% (see: all the Healthcare ETFs here).

Bottom Line

The upward trend in the above-mentioned products is likely to continue given their Zacks ETF Rank of 2 or ‘Buy’ rating, suggesting their outperformance in the coming months as well. In fact, these ETFs have clearly been outpacing the other products in the biotech space over the trailing one-month period.

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