ULTUMUS News

Safer Way to Play “Biotech”

Written by Ultumus | May 31, 2024 8:38:34 AM

Sticking with proven pharma giant winners

The most well known biotech ETF, XBI, is currently trading nearly 50% below the highs reached in February 2021. It had a torrid 2022 in common with other tech stocks but almost completely missed out on the tech rebound in 2023 that propelled the Nasdaq 100 index to new highs. AI is the obvious explanation. Though there is in fact potential for AI to enhance and expedite the drug research and discovery process, this narrative has not caught on with investors in the way that way that it has for semiconductor chips.

 

One challenge for biotech stocks is that many have no revenues, let alone profits, and can get lumped into the “unprofitable tech” basket that performed very well in 2020 but badly since. Rather than investing early stage biotechs developing drugs that may need years of clinical trials and regulatory approvals before coming to market, a new ETF focuses on drugs with existing or expected sales over a billion.  

 

Whereas ABI tracks the S&P® Biotechnology Select IndustryTM Index, Kiwoom Asset Management’s new KOSEF US Blockbuster Biotech Drugs Plus ETF tracks the Solactive Blockbuster Drugs Index, which has two selection criteria. 

 

A “Blockbuster Drug Company” already has at least one product generating annual revenue of at least one billion, while an “Expected Blockbuster Drug Company” has at least one product expected to make a billion dollars of sales over the next five years.

 

Though the ETF is new, the index goes back to February 2019, and has risen by 120% since then, with a much smoother and less volatile ride than XBI. Its average annual volatility of 17% is broadly in line with global equities, and its worst peak to trough drawdown of 20% is much less than global equities or XBI, which saw a c.60% drawdown from February 2021 to its twin troughs in June 2022 or October 2023.

 

The Solactive index is a concentrated one with 28 members. The top ten names should be familiar. The top two, Novo Nordisk and Eli Lilly, have recently done especially well from anti-obesity drugs. The others, Merck, Sanofi, Johnson and Johnson, Abbvie, Amgen, Astrazeneca, Bristol Myers, and Pfizer, are all well known giants, several of which profited from Covid vaccines. 

 

The only possible concern about this product and index is labelling. Most of its members are normally classified as “pharmaceuticals” or “healthcare” rather than biotech. Amgen is the only one in the top ten that is typically described as a “biotech”, and the only one also featuring in the top ten of XBI. The Kiwoom ETF could arguably straddle several labels – healthcare, pharma, biopharma and biotech, and is clearly not a pure play on biotech with firms such as Johnson and Johnson also selling baby bath soaps. 

 

Investors who explicitly want to invest in smaller and earlier stage biotechs, researching and discovering new drugs, should arguably look elsewhere, but those who want the predictability of proven winners could consider the Kiwoom ETF.