Biotechnology ETFs enjoyed bug jumps at the beginning of this week, thanks primarily to a huge increase in the stock price of a key component of several funds. Human Genome Sciences Inc. (HGSI) has jumped more than 450% over the last week on news that its lupus drug Benlysta showed late-stage success in a clinical trial. The potential breakthrough development – a new lupus treatment hasn’t been approved by the FDA in more than 50 years – spurred hope that the drug could breeze through its second Phase III trials in November and hit the market as soon as late 2010.
According to results released by HGSI, 51.7% of patients taking 1 mg of Benlysta experienced improvement, compared to 57.6% of those taking 10 mg and 43.6% taking a placebo. The market seems to believe that, despite a relatively small sample size of 865 patients, the trials indicate the drug will hit the market as planned. However, lupus patients often relapse after showing signs of significant improvement, a major hurdle remaining on the path to full-blown approval. While the drug could potentially bring in billions of dollars from prescriptions, the market is likely pricing in the level at which GlaxoSmithKline (GSK), which has a 50% stake in the drug, will pay to make it wholly-owned. It is widely believed that Glaxo will gladly pay a huge premium to acquire the remaining 50%. While HGSI shareholders are the obvious beneficiaries of this speculation, a number of health and biotech ETFs that hold the stock saw big gains as well:
- PowerShares Dynamic Biotechnology & Genome Portfolio (PBE): Following its huge rally on Monday, HGSI accounted for 11.7% of PBE’s holdings (and this number is likely to rise after HGSI continued to climb on Tuesday), more than twice as much as any other holding. PBE has gained nearly 14% over the last week.
- First Trust Amex Biotechnology Index Fund (FBT): Although FBT tracks an equal dollar-weighted index, HGSI’s rise over the past week has significantly increased the company’s allocation within the ETF. After Tuesday’s gains, HGSI accounted for nearly 17.5% of FBT’s holdings, more than three times the next closest company. FBT is up more than 22% over the last week, largely due to increases in HGSI.
- iShares Nasdaq Biotechnology Index Fund (IBB): IBB, which holds all companies in the biotechnology and pharmaceutical sub-index of the Nasdaq Composite, has a much smaller stake in HGSI, with the company accounting for just 0.6% of assets following its huge gains. Still, IBB has has risen about 3% over the last week.
HGSI’s news this week highlights the significant upside potential in any fund related to the pharmaceutical industry. But there are also very real downside risks as well (take a look at IBB’s performance in late February for a good example). Clinical trials for new drugs are often a “live or die” event, with prospects brightening significantly is the drug is proven to be viable and falling off a cliff if deemed to be ineffective or dangerous. All of this can make for some wild rides, even in relatively well-diversified ETFs.
Disclosure: No positions at time of writing.