Celgene and Other Biotech Stocks Could Get a Boost From ETFs Buying In

The Back Story. In 2018, the health-care sector enjoyed investors’ rotation away from technology stocks to an extent, but not all drug makers benefitted. Although some individual pharma firms shone—
Merck

(ticker: MRK) and
Pfizer

(PFE) were the best-performing stocks in the Dow Jones Industrial Average in 2018—biotech as a whole suffered in stride, with both the
SPDR S&P Biotech ETF
(XBI) and the
iShares Nasdaq Biotechnology ETF
(IBB) ending the year on a downbeat note. There were a number of factors weighing on the sector, from the potential of drug-pricing legislation to less M&A than some hoped, and some warned that the industry would have another tough go in 2019.

The Plot Twist. Not surprisingly, poor performance (along with the overall market selloff marked by investors’ risk-aversion) led to investors yanking their money from biotech last year. Jefferies’ Michael Yee writes that third-party data shows that the fourth quarter saw not only the biggest actively managed fund outflows in the biopharma space in 15 years, but outflows that were double the biotech bear market of 2016.

Moving Forward. That sounds pretty dire, but last year is old news. Consider, Yee says, what’s happened since the start of 2019: The XBI has “raced back and quickly recovered the bad December in just weeks.” Moreover, despite that move, the ETF is still down about 15% from its third-quarter levels. That means that the huge outflows in the fourth quarter still have more room to reverse, and XBI and IBB—both up double-digits year to date—could see more money piling back in. “a continued recovery in the XBI would likely to get more biopharma fund flows pouring back in during the first half of the year…We think fund managers will be forced to ‘chase’ the recent performance given they are generally quite under-weight the group.”

It’s worth noting that some big biotech ETF holdings, like
Sage Therapeutics

(SAGE),
Celgene

(CELG), and
bluebird bio

(BLUE), for example, are running well ahead of the market so far this year, while ETFs have yet to really catch up, with ongoing outflows. “If we see additional M&A activity for example, we think investors will become more engaged and flows will turn around quickly like we have seen before,” argues Yee. “This could provide a very nice tailwind for biotech.”

Write to Teresa Rivas at teresa.rivas@barrons.com