Is the Biotech Slump Over?

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In 2013, the biotech sector was one of the best areas of the market, posting a bigger return than the S&P 500. In the past few months, driven by a number of failed studies for biotech drugs, the industry went into a slump.

The first week of May saw three biotechs all report failures with their leading drug candidates.

“These unexpected blowups and the overall flight from risk hurt the small-cap biotech sector with valuations under $1 billion,” said Ron Garren, an oncologist and editor of BioTechInsight.com, an online biotech stock newsletter in Carmel, Calif.

“They got decimated and some lost more than half their value. Of course, some were overvalued to begin with.”

iSharesNasdaq Biotechnology ETF 1-Yr

iSharesNasdaq Biotechnology ETF 1-Yr

From late February to May 8, iSharesNasdaq Biotechnology ETF (IBB), which tracks all the biotechs on the Nasdaq, and PBE each tumbled 18%. XBI sank 29%.

Over the past month, XBI climbed 21% for a year-to-date return of 15%. PBE is up 14% for an 18% gain this year. IBB, the biggest biotech ETF with $5.2 billion in assets, advanced 10% the last 30 days for a 10% return year-to-date.

ProShares Ultra Nasdaq Biotechnology ETF (BIB) is a leveraged fund that seeks to post a daily return twice the results of the Nasdaq Biotechnology Index.

It fell 35% during the biotech correction, but gained 21% over the past month. Year to date, BIB is up 16%, but its return over the past 12 months is 82% compared with the 32% return for the average biotech ETF.

So why the sudden uptick in gains? 

“As the yields on dividend stocks begin to dry up, risk stocks look more attractive, and after the biotech beat down, I think these stocks are a great opportunity,” said Garren.

Pharma giant Merck ( MRK ) agreed to buyIdenix Pharmaceuticals ( IDIX ) for $3.85 billion, leading investors to believe the biotech sector has bottomed out after three months of misery.

Last week, the big pharma drugmaker offered the tiny biotech $24.50 a share, a 239% premium to its closing price Friday, in order to acquire Idenix’s portfolio of three early-state hepatitis C drugs.

The news sparked a rally in the biotech sector and biotech ETFs. PowerShares Dynamic Biotechnology &Genome Portfolio ETF ( PBE ) jumped 8.4% Monday, to advance 11% for the week ending June 10. It now has about 9% of its assets in Idenix.

SPDR S&P Biotech ETF ( XBI ), now with 4% in Idenix, leapt 6.8% Monday, for a 14.6% gain over the past five days. Overall, biotech sector ETFs rose an average of 5% over the past week.