Biotechnology has been one of the best performing industries in the stock market over the past several years. According to S&P Capital IQ, there were numerous catalysts, for this substantial stock outperformance, including several blockbuster drug approvals that drove significant sales and earnings growth. Yet, we think the industry’s drivers, including a robust pipeline, remain intact and have a positive fundamental outlook.
S&P Capital IQ equity analyst Jeff Loo notes that expects approximately a dozen drugs to be approved and launched in 2015 with the potential to achieve blockbuster sales levels of more than $1 billion annually by their fifth year after launch (2020). Total sales for the seven biotech companies in the S&P 500 rose 41.5 % in 2014, driven by new drug approvals, and sales growth of 122%. In 2015, our forecasted rate of increase moderates to 13.2%, nonetheless, an impressive rate, in our view. Loo projects gross margin for those seven S&P 500 constituents, to widen to 89.8% in 2015, from 88.6% in 2014.
From January 1, 2011 to December 31, 2014, the S&P 1500 Biotechnology stock index rose 288.5% compared with the 63.6% rise for the S&P Composite 1500. As such, the S&P 1500 biotech industry’s valuation has expanded significantly from 12X forward 12-month EPS in 2011 to 18X in 2014. However, in spite of the significant multiple expansion, biotech’s current 19.1 multiple is equal the health care sector’s PE multiple of forward 12-months EPS and only slightly higher than the broader S&P 1500’s PE multiple of 18X, despite much stronger growth.
Investors have increasingly utilized ETFs in a tactical manner to gain exposure to industries, while benefitting from the ability to make intra-day trades and benefit from their low-cost, passive nature. In 2014, $41 billion was added to all sector ETFs, with nearly $6.4 billion in health care securities. In the first two months of 2015, health care products added an additional $3.0 billion of fresh money.
S&P Capital IQ has research and rankings on a number of ETFs that have meaningful exposure to the biotech industry. Visit http://trymsatoday.com/ to see the full article and/or view our ETF reports.
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