Andy Wong/The Associated Press
It's the perfect marriage between an old world, pillar of the economy, and modern, game changing science. Because Canadians live in a country where access to health care is a public right, the power this industry wields in the U.S. is often overlooked. While health care continues to be a compelling investment opportunity, biotech is a related area that has consistently outperformed both broad indices and all other sectors.
If we illustrate the opportunity using the four biggest biotech ETFs in the U.S. (iShares Nasdaq Biotechnology Index Fund, SPDR S&P Biotech ETF, First Trust AMEX Biotechnology Index Fund and Market Vectors Biotech ETF) the magnitude of success is off the charts. The average returns over one, three and five years are 38.2 per cent, 105.5 per cent, and 129.9 per cent. Digging deeper into these numbers, performance is being driven by a diverse group of names. Two of the four ETFs are equal weighted – FBT holds 20 companies in its portfolio, none of which account for more than six per cent of the total, and XBI holds 52 companies, none of which account for more than 3 per cent of the total.
Much like the tech sector, the biotech industry has evolved over the last 20 years, from an endless number of startups to a select group of companies that survived the uncertainty, able to emerge from the fray because they demonstrated expertise in both the lab and the boardroom. Unlike the tech pure-plays, these firms work in health care, an area that Americans will spend $2.8-trillion on in 2013. Cementing strong relationships with the major players in this industry has provided the leading biotech companies with deep pockets, enabling them to pour money into research and development, ensuring that their product pipelines will continue to flow with profitable discoveries into the future.
While there is no shortage of promising public companies to choose from, a biotech ETF should be anchored by the following industry leaders:
Gilead Sciences
This biopharmaceuticals company specializes in the discovery, development and commercialization of drugs that treat a wide variety of conditions, including HIV and liver disease. Based in California, the company has been in operation since 1987. GILD has a market capitalization of $80-billion (U.S.). Its share price has climbed 106.9 per cent over the last 12 months, and 173.0 per cent over the last three years. The company has a profit margin of 28.9 per cent (average of the last four quarters).
Amgen
This firm focuses on therapeutics that fight cancer, kidney disease, arthritis, bone disease and other serious illnesses. The company was launched in 1980 and is also located in California. AMGN has a market capitalization of $78-billion. Its stock price has appreciated 50.9 per cent over the last year, and 89.0 per cent over the last three years. The company has a profit margin of 26.4 per cent.
Celgene
This global biopharmaceutical company is focused on treating cancer, and other severe, immune, inflammatory conditions. Launched in 1986, the company is headquartered in New Jersey. CELG has a market capitalization of $51-billion. Its share price has risen 74.3 per cent over the last twelve months, and 108.5 per cent over the last three years. The company has a profit margin of 25.3 per cent.
Biogen Idec
One of the oldest biotech companies in the world, BIIB therapies focus on neurodegenerative diseases, hemophilia and autoimmune disorders. Founded in 1978, the company is based in Massachusetts. It has a market capitalization of $50-billion and it share price has gone up 59.0 per cent over the last year, and 312.1 per cent over the last three. BIIB has a profit margin on 26.7 per cent.
Pairing a high-growth, specialized sector with massive, mature and cash-rich partners provides the best of both worlds. Yet investors don't have to compromise and buy both. Using ETFs, they can target the biotech heavyweights that have been posting triple digit returns over the long-term. This is an industry that shows no signs of slowing down and is exactly the type of innovative, forward-looking opportunity the Canadian market, which is too heavily tied to the slow-moving big banks, needs more of.
ETFinsight is a website dedicated to helping Canadians connect with relevant ETF solutions. Read more at www.etfinsight.ca, follow us on Twitter@etfinsight and Josh Erhlich can be contacted at: josh@etfinsight.ca