Big Biotech in the Bargain Bin The sell-off in biotech stocks that began last summer has resulted in valuations that are on par with and in some cases lower than those seen in the broad equity market (at this writing, 2/17/16). Biotech valuations have not dipped this low since the aftermath of the 2007-2008 financial crisis. For investors with an appetite for biotech, this may provide a bargain-priced opportunity.
Since 2005 U.S. biotech stocks have traded at higher earnings multiples than the broader S&P 500® Index. Over the last 10 years biotech stocks have had an average price-earnings (P/E) ratio of 23.3 versus 16.2 for the S&P 500 Index. Today those metrics are nearly equivalent in the 16 P/E range. A number of large-cap biotech companies have traded below general market valuations, e.g., Amgen (AMGN), which traded at 16.2x earnings and Gilead Sciences (GILD) at 7.7x earnings, as of 2/17/16. By comparison, Market Vectors® Biotech ETF (BBH) has a P/E ratio of 18.6 as of 2/17/16. BBH seeks to track the Market Vectors U.S. Listed Biotech 25 Index, which is comprised of the 25 largest and most liquid U.S.-listed biotech stocks.
P/Es of Biotech Stocks Fall Below P/E of Broader U.S. Equities
Historical Averages 12/31/2005 – 2/17/2016
While pricing concerns, weakness in emerging markets currencies, and the strength of the U.S. dollar may have contributed to weakness in biotech, there may be better news down the road. The expected total number of upcoming clinical trials, new drug applications, and new biologics up for approval is 32% higher now than five years ago.1 As the global population ages, demand for drugs is growing. Additionally, the current price environment may compel large biotech companies with healthy cash balances to grow their businesses through acquisitions or engage in share buyback programs; such activity could support share prices.
Amidst these trends, investors may consider targeting large biotech companies via an exchange-traded fund such as Market Vectors Biotech ETF ( BBH) to potentially capture value in the biotech industry.
Sources: VanEck, FactSet and Bloomberg. Data as of 2/17/2016.
ETFs is authored by VanEck thought leaders. VanEck is the sponsor of Market Vectors ETFs and is currently among the largest providers of exchange traded funds (ETFs) in the U.S. and worldwide. Market Vectors ETFs empower investors to help build better portfolios with access to compelling investment themes and strategies. Our ETFs span many global asset classes, and are built to be transparent, liquid, and pure-play reflections of target markets.
Authored by Gabor Gurbacs, ETF Data Analyst
IMPORTANT DISCLOSURE
1 Source: Bloomberg and VanEck ETF Research
Index Descriptions: (i) The S&P 500 (The Standard & Poor’s 500) Index is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. (ii) The S&P 500 Biotechnology Index represent the biotechnology sub-industry segment of the S&P 500 Index. (iii) The Market Vectors® US Listed Biotech 25 Index comprises of the 25 largest and most liquid U.S. listed biotech companies.
Price/Earnings Ratio is the price of a security divided by the earnings per share of the security.
An investment in the Fund may be subject to risks which include, among others, expiration of patents or loss of, or inability to enforce, intellectual property rights, significant development costs, complex regulatory oversight, litigation expenses, reliance on third party payors to reimburse costs related to products or services, extremely volatile stock prices, and risks associated with non-U.S. issuers listed on U.S. exchanges, all of which may adversely affect the Fund. Small- and medium-capitalization companies may be subject to elevated risks. The Fund’s assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.
Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Investors cannot invest directly in the Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses. Index returns assume that dividends have been reinvested.
Market Vectors US Listed Biotech 25 Index is the exclusive property of Market Vectors Index Solutions GmbH (a wholly owned subsidiary of the Adviser), which has contracted with Solactive AG to maintain and calculate the Index. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards Market Vectors Index Solutions GmbH, Solactive AG has no obligation to point out errors in the Index to third parties. The Market Vectors US Listed Biotech ETF is not sponsored, endorsed, sold or promoted by Market Vectors Index Solutions GmbH and Market Vectors Index Solutions GmbH makes no representation regarding the advisability of investing in the Fund.
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