It has been a highly eventful year for the biotech sector thanks to mergers and acquisitions (M&A), deals galore, pricing controversy, stretched valuations and the usual pipeline updates. Although the sector has had its share of hiccups, the NASDAQ Biotechnology index is up 7.7% YTD.

 
Let’s Sign More Deals
 
While 2014 was one of the most active years where M&As and licensing agreements were concerned, the trend continued this year as well. To combat thin pipelines and generic competition, pharma companies sitting on huge piles of cash continue to seek suitable acquisition targets. Some of the important acquisitions announced/completed this year include those between Shire-NPS Pharmaceuticals, Alexion-Synageva and AbbVie-Pharmacyclics among others. AbbVie’s hefty price tag of $21 billion for Pharmacyclics raised quite a few eyebrows. (Read: 16 ETFs You Can’t Go Wrong With in 2016)
 
Licensing agreements and deals including those with opt-in arrangements have also picked up pace with immuno-oncology remaining a favorite area. Companies like Kite, Ionis, Achillion and Juno have all been pretty active on the collaboration front. Most of the deals signed by these companies are with big pharma and biotech companies and are focused on immuno-oncology as well as hepatitis C virus (HCV).
 
Blockbuster Potentials Gain Approval
 
Highly-awaited new products that gained approval last year should contribute significantly to revenues. Gilead’s HCV combination treatment, Harvoni, is already bringing in multi-billion dollar sales for the company.
 
Meanwhile, so far in 2015, the FDA has approved 43 new molecular entities (NMEs) and biological products. Some of the important new product approvals this year include Vertex’s cystic fibrosis treatment, Orkambi, Amgen’s PCSK9 inhibitor, Repatha, Regeneron/Sanofi’s PCSK9 inhibitor Praluent, Gilead’s Genvoya (HIV) and label expansions for products like Kyprolis.(Read: 16 Bold ETF Predictions for 2016)
 
Pricing Concerns Remain an Issue
 
Both pharma and biotech companies are under a lot of pressure regarding the high price tags for new drugs. Democratic presidential frontrunner Hillary Clinton’s “price gouging” tweet triggered a slide in healthcare stocks in September. Irrespective of who wins the presidential race, drug pricing will remain a topic of discussion among policymakers, the media and the general public.
 
A major focus in 2016 will be on how pricing dynamics play out in the PCSK9 inhibitor market now that both Repatha and Praluent are approved. Pharmacy benefit manager (PBM) Express Scripts, which played a major role in providing costly HCV treatments at a discount, said that despite the limited initial indications for Repatha and Praluent, PCSK9 inhibitors could end up becoming the most expensive therapy class in the U.S. over the next several years.

Biosimilar Competition: A New Challenge
 
2015 also marked the FDA approval and launch of the first biosimilar in the U.S. – Sandoz’s Zarxio – a biosimilar of Amgen’s Neupogen. The approval is a landmark decision and follows years of debate regarding the regulatory path for biosimilars. Unlike their pharma counterparts, biotech companies have not been exposed to generic competition in the U.S. But with the approval of Zarxio, the floodgates have opened. (Read: Best & Worst ETFs of 2016)
 
ETFs in Focus
 
Highlighted below are some biotech ETFs - ETFs present a low-cost and convenient way to get a diversified exposure to the sector.
 
iShares Nasdaq Biotechnology ETF (IBB - ETF report)
 
IBB, launched in Feb 2001 by BlackRock Investments LLC, tracks the Nasdaq Biotechnology Index. The fund mainly covers biotech stocks (79.7%) with pharma accounting for 14.2%, life sciences tools & services for 5.9% and Health care supplies for 0.09%. The top 3 holdings include Amgen (8.81%), Regeneron Pharmaceuticals, Inc. (8.47%) and Biogen (8.28%). The total assets of the fund as of Dec 17, 2015 were $8.01 billion representing 142 holdings. The fund’s expense ratio is 0.48% while dividend yield is 0.02%. The trading volume is roughly 2,229,695 shares per day.
 
SPDR S&P Biotech ETF (XBI - ETF report)
 
XBI, launched in Jan 2006 by State Street Global Advisors., tracks the S&P Biotechnology Select Industry Index. The fund primarily covers biotech stocks (99.5%). The top 3 holdings include Five Prime Therapeutics, Inc. (2.34%), Dyax Corp. (1.84%) and Ophthotech Corp. (1.65%). The total assets of the fund as of Dec 17, 2015 were $2.1 billion representing 103 holdings. The fund’s expense ratio is 0.35% while dividend yield is 0.64%. The trading volume is roughly 4,200,037 shares per day.
 
First Trust NYSE Arca Biotechnology Index Fund (FBT - ETF report)
 
FBT, launched in Jun 2006 by First Trust Advisors, tracks the NYSE Arca Biotechnology Index. The top 3 holdings include Nektar Therapeutics (4.55%), Dyax Corp. (4.16%) and Ionis Pharmaceuticals, Inc. (formerly known as Isis Pharmaceuticals, Inc. - 4.04%). The total assets of the fund as of Dec 17, 2015 were $3.3 billion representing 30 holdings. The fund’s expense ratio is 0.58% while dividend yield is 0.17%. The trading volume is roughly 136,328 shares per day.
 
Market Vectors Biotech ETF (BBH - ETF report)
 
BBH, launched in Dec 2011 by Van Eck, tracks the Market Vectors US Listed Biotech 25 Index. The fund covers health care stocks. The top 3 holdings include Gilead (15.86%), Amgen (12.62%) and Celgene (10.49%). The total assets of the fund as of Dec 18, 2015 were $684.4 million representing 26 holdings. The fund’s expense ratio is 0.35% while dividend yield is 0.00%. The trading volume is roughly 62,235 shares per day.
 
PowerShares Dynamic Biotechnology & Genome Portfolio – GENOME (PBE - ETF report)
 
PBE, launched in Jun 2005 by Invesco PowerShares, tracks the Dynamic Biotech & Genome Intellidex Index. The top 3 holdings include BioMarin Pharmaceutical Inc. (5.58%), Biogen Inc. (5.16%) and Alexion Pharmaceuticals Inc. (5.14%). The total assets of the fund as of Dec 18, 2015 were $405.6 million representing 30 holdings. The fund’s expense ratio is 0.57% while dividend yield is 0.52%. The trading volume is roughly 28,827 shares per day.
 
Conclusion:
 
High risk and high returns -- this is a term that is often associated with the biotech sector. Biotech drugs, which are developed through a biological process/system or by using living organisms, require a lot of investment. The drugs are complex in nature and take several years to develop. Companies which hit the bull’s eye become overnight success stories with shares even doubling or tripling on positive news. However, negative outcomes have an equally strong effect on the shares and failure may very well spell doom for these companies.
 
Strong pipelines, innovative treatments, impressive results, growing demand for drugs especially for rare-to-treat diseases, an aging population and increased health care spending should support growth in this sector. With the sector witnessing a lot of M&A and licensing activity, expectations are high that more such deals will follow. Catalysts remain in the form of regulatory events and pipeline updates.
 
On the flip side, the high cost of treatments, pricing controversies and the threat of biosimilars remain dampeners for this high risk-high return sector.