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Two Biotech ETFs Surge on Idenix-Merck Deal

Sweta Killa

Idenix Pharmaceuticals (IDIX), a maker of hepatitis C drugs, was a star performer in Monday’s trading session, as the stock skyrocketed by over three-fold on the day. The massive gain for this biotech firm came after the second largest U.S. drug maker Merck (MRK) agreed to buy Idenix for $3.85 billion.

As per the deal, Idenix holders will receive $24.50 per share in cash, which represents 3.5 times premium to the IDIX closing price as of June 6. The deal is expected to close in the third quarter (read: Merck (MRK) Earnings Beat Puts Healthcare ETFs in Focus).

The acquisition will help Merck in tapping the lucrative market for hepatitis C drugs, wherein the drug companies are fighting to develop a combination therapy without injections and debilitating side effects. This is because Idenix currently has three hepatitis C drugs in its clinical development which will help Merck strongly compete with the successful Gilead Sciences’ (GILD) hepatitis C drug, Sovaldi.

Close to four million Americans and 170 million people globally suffer from chronic hepatitis C, according to the various sources. The disease is common among ‘Baby Boomers’ as the prevalence of chronic hepatitis C infection in this category is six times greater than that of adults, according to the Centers for Disease Control and Prevention.  

With that being said, Merck intends to cure the disease fully and Idenix’s drug offers the possibility of doing the same when combined with Merck’s existing compounds. This is especially true as Merck could form a better pill that has less side effects and can be taken for a shorter period of time (read: A Comprehensive Guide to Biotech ETFs).

Market Impact

Idenix’s acquisition by Merck was well received by investors and has changed the hepatitis C industry valuation. The stock added more than $16 per share on the day to finish above the $23 per share mark, while it crushed its average volume figures, as nearly 41 million shares moved hands compared to just 1.9 million on average.

The news also led to a surge in two biotech ETFs – PowerShares Dynamic Biotechnology & Genome Portfolio (PBE) and SPDR S&P Biotech ETF (XBI). Both the funds gained 8.4% and 6.8%, respectively, on Monday’s session making the duo the top non-leveraged performers of the day (read: Any Survivors from the Biotech ETF Meltdown?).

PBE in Focus

This fund provides exposure to 30 firms by tracking the Dynamic Biotech & Genome Intellidex Index. Idenix takes the top spot with 9.27% of assets while other firms account for less than 4.9% share. The ETF is spread across various market caps – 34% in large caps, 33% in mid caps and the rest in small caps. This fund manages a $355.6 million in asset base and charges 63 bps in annual fees.

XBI in Focus

This fund follows the S&P Biotechnology Select Industry Index and holds about 85 securities in its basket. Of these firms, IDIX occupies the fifteenth position with 1.46% allocation. Not a single company makes up more than 2.6% of assets, so it is very well spread out among its components. The ETF puts more focus on small- and micro-cap stocks at 68%, while mid and large caps account for the rest. The product has nearly $1 billion in AUM and charges 35 bps in annual fees.

Bottom Line

The upward trend in both the ETFs is likely to continue given their Zacks ETF Rank of 2 or ‘Buy’ rating with High risk outlook, suggesting their outperformance in the coming months as well (see: all the Healthcare ETFs here).

In fact, the two ETFs have clearly outpaced the other products in the biotech space. iShares Nasdaq Biotechnology ETF (IBB) and First Trust NYSE Arca Biotechnology Index Fund (FBT) added nearly 0.8% on the day while Market Vectors Biotech ETF (BBH) lost 0.3%. This is because these products have little or no exposure to Idenix Pharma.

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