Biotech stocks and the related ETFs have been the star performers this year despite some temporary glitches and rough trading in between. Encouraging industry trends, increasing merger and acquisition activities, expansion into emerging markets and ever-increasing health care spending led the sector to easily outperform the broader U.S. equity markets.
Though lofty valuations and regulatory concerns did bring in some pain to biotech stocks & ETFs, solid Q2 corporate earnings results from top biotech companies and strong fundamentals within this corner supported the space to make a strong comeback and emerge as winners (read: The Complete Guide to Biotech ETFs ).
The space has yet again come out with flying colors this earnings season with most of the biotech companies topping the Zacks Consensus Estimates on both revenues and earnings. Also, most of the top biotech names have increased their guidance for 2014 both on the top and the bottom line, suggesting bright prospects ahead.
The world’s largest biotech firm, Amgen ( AMGN ), has yet again topped the Zacks Consensus Estimate for third-quarter 2014 earnings as well as revenues. Gilead too managed to beat our estimates despite Solvaldi, their blockbuster hepatitis C treatment, missing the sales target. Other top players in the space including Celgene ( CELG ), Biogen Idec ( BIIB ) and Alexion Pharmaceuticals ( ALXN ) have also easily managed to beat our estimates on both earnings and revenues.
GILD Earnings in Focus
The company reported solid third-quarter numbers with net income more than tripling to $2.73 billion from $789 million in the year-ago quarter. Adjusted earnings per share came in at $1.84, easily surpassing the Zacks Consensus Estimate of $1.64. Revenues rose 117% to $6.04 billion topping our estimates of $5.8 billion.
However, sales of Sovaldi fell 20% in the third quarter from the June period. Sovaldi’s sales came in below market expectations at $2.8 billion, also down from the prior quarter sales of $3.48 billion, which dragged Gilead’s shares 4% lower in after-market trading hours.
Lower-than-expected sales of Sovaldi can be blamed on GILD’s new and improved combination, once-a-day pill, Harvoni, which has already been approved by the FDA earlier this month. Harvoni will be priced at a hefty $1,125/pill, or $94,500 for a 12-week course treatment as against $1,000/pill, or $84,000 for the regular 12-week course of Sovaldi.
However, the drug eliminates the need of additional therapies and many expect that the majority of patients will be able to take Harvoni for only eight weeks, lowering the cost to about $63,000 (read: Biotech ETFs Slip on Gilead Weakness; Buying Opportunity Now? ).
Gilead raised the low end of its 2014 forecast for net product sales to $22 billion to $23 billion from $21 billion to $23 billion issued in July.
AMGN Earnings in Focus
The company reported earnings of $2.30 per share, well above the Zacks Consensus Estimate of $2.06, driven by higher revenues and profitability on Enbrel. Moreover, total revenues increased 6% to $5,031 million in the reported quarter, beating the Zacks Consensus Estimate of $4,918 million.
Amgen raised its guidance for 2014 yet again, topping our expectations. The company now expects to earn $8.45-$8.55 per share on total revenues of $19.8 billion to $20 billion, exceeding the Zacks Consensus Estimate for earnings and revenues of $8.24 per share and $19.6 billion, respectively (see: all the Healthcare ETFs here ).
Given the earnings beat and solid growth outlook, Amgen shares jumped 6% to $157.19 in yesterday’s trading session. Gilead’s shares dropped 4% in extending market trading on account of the Solvadi sales miss. Though the stock might trade lower for some more days, it nonetheless has good long-term prospects thanks to the upcoming international release of Harvoni.
Other stocks, including Amgen, Celgene and Biogen, have also seen a surge in their shares following encouraging results (Read: Healthcare ETFs for your portfolio’s wellness ).
Given the encouraging results, all the Biotech ETFs have seen considerable gains in their prices for the past one week. Below we have highlighted two top-ranked biotech ETFs which investors can surely add to their portfolio given the solid Q3 earnings results and strong fundamentals in the space.
Market Vectors Biotech ETF ( BBH )
This fund tracks the Market Vectors US Listed Biotech 25 Index, holding 26 securities in the basket. The product has so far amassed $615 million in its asset base and sees moderate trading volumes of roughly 97,000 shares a day.
Gilead, Amgen, Celgene and Biogen occupy the top four spots in the fund, with a combined exposure of 45%. The fund has returned 27.6% this year and charges 35 basis points as expenses. BBH currently has a Zacks ETF Rank #1 or Strong Buy rating.
SPDR S&P Biotech ETF ( XBI )
This fund follows the S&P Biotechnology Select Industry Index and holds about 84 securities in its basket. It is quite well spread out across its components with none of the stocks having more than 2.5% allocation. In fact, Gilead, Biogen Celgene, Alexion and Amgen have a combined 7% allocation.
The ETF puts more focus on small- and micro-cap stocks at 76%, while mid and large caps account for the rest. The product has nearly $1.3 billion in AUM and sees solid volume of 383,000 shares per day. It charges 35 bps in annual fees and has returned 30% this year. XBI currently carries a Zacks ETF Rank #2 or Buy rating.
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