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Can new M&A boost the ALPS Medical Breakthroughs ETF?

The ALPS Medical Breakthroughs ETF has struggled since its peak in 2021, as investors became increasingly unwilling to take on the risks associated with growth stocks. However, with inflation seemingly easing and a potentially positive M&A outlook in the biotech space, the fund could be set for a strong few months.

- The ALPS Medical Breakthroughs ETF is up 1.5% in the past two weeks.

- Merck will acquire Prometheus Biosciences, the fund’s top holding, for $10.8bn.

- An uptick in M&A activity could further boost the fund. 

The ALPS Medical Breakthroughs ETF [SBIO] offers exposure to companies that have at least one drug currently in clinical trials, and which have a value of between $200m and $5bn.

The fund is down 9.2% year-to-date, but up 1.5% in the past two weeks, as top holdings have performed well.

The fund’s large exposure to growth and early-stage companies has weighed on its performance since 2021, as investors have moved away from high-risk shares in a search for stability. However, in the last couple of months, signs that inflation is slowing have encouraged investors to reconsider growth stocks in their portfolios.

The ALPS Medical Breakthroughs ETF offers strong exposure to the dermatology, respiratory, eye, ear and neurology—or DREEN—sector, which makes up 44.4% of its total holdings as of 31 December. It also holds companies covering rare and orphan disease at 26%, cancer at 22.6% and cardiology and haematology at 7% of its portfolio.

Top holding soars on trial and acquisition news

As of 14 April, the fund’s largest holding is Prometheus Biosciences [RXDX] at 3.64% of assets under management. The company’s share price has soared by 263.4% in the last year, though it is down 0.9% over the past month.

On 7 December, the California-based biotechnology company posted strong trial data for its ulcerative colitis treatment, sending its stock up 165.7%. Since the December announcement, the shares are up 216.2%.

On Sunday, Merck [MRK] announced it would be buying Prometheus Biosciences for approximately $10.8bn, as part of an effort to bolster its immunology offering. Merck has agreed to pay $200 per share for the company, a 75.4% premium over Friday’s closing price of $114.01. Merck is aiming to close the deal in the third quarter of 2023.

The fund’s second-biggest holding, Roivant Sciences [ROIV], has jumped 95.6% in the last 12 months, though it has dropped 18.4% in the past month. Roivant develops new medicines through companies that it has built, called Vants. It has already completed 10 phase 3 trials, out of which nine have been successful thus far. 

New M&A opportunities and strong analyst forecasts

One of the main factors that could push the ALPS Medical Breakthroughs ETF higher in 2023 is the number of biotech deals, should they continue to develop. Merck’s acquisition of Prometheus Bioscience is just one example of how large pharma companies are acquiring smaller, early-stage biotech companies at lofty valuations.

As the Covid-19 pandemic passes into history, big pharma appears to be turning its focus towards M&A in order to maintain profits. Pfizer [PFE] has initiated four acquisitions since October, with the latest being Seagen [SGEN], a Seattle-based biotech focused on oncology. The $43bn offer is awaiting US regulatory approval.

Out of 11 analysts polled by Refinitiv, five gave Prometheus Biosciences a ‘buy’ rating while four rated the shares as ‘outperform’ and one ‘hold’.

Out of the nine analysts offering recommendations for Roviant Sciences, three gave it ‘buy’ ratings while the remaining six believe shares will ‘outperform’.

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