BioShares: Two Ways to Play Biotech

05/11/2015 10:00 am EST

Focus: ETFs

Portfolio manager Paul Yook takes a unique approach to biotech; at BioShares he managed two ETFs that separate stocks in the sector into the higher risk companies still undergoing clinical trials and the relatively lower risk plays that have already commercialized products. Here, he explains the structures of the two funds and highlights several of their top holdings.

Steven Halpern:  Our special guest today is Paul Yook, Portfolio Manager at BioShares, which operates two specialized exchange-traded funds within the biotechnology area.  How are you doing today, Paul?

Paul Yook:  I'm doing very well, Steven, thanks.  

Steven Halpern:  Well, thank you for taking the time today. Before we look more closely at your two ETFs, can you share your general thoughts on the overall biotech state and specifically with biotech having been so strong in recent years, could you address whether or not investors should be worried about a bubble in this space.  

Paul Yook: Currently, there is a lot of debate on whether biotech is in a bubble and we think it's a healthy discussion. In my opinion, bubbles exist when investors have reckless disregard for valuation metrics and future expectations, and so there's a panic to buy; investors want to get in before it's too late.  We don't think we have that today.  

Now, I've been following biotech since the mid-90s.  In my opinion, I think we really only had one true bubble in biotech, that was around 1999 to 2000.

Really, at the same time as the dot com bubble and there was a genomics bubble, a genomics boom when we were beginning to sequence the human genome, there was a lot of excitement and very large expectations around what kind of new drugs and technologies would result from all the knowledge that we had from sequencing our genome.  

That really didn't materialize and so some of these genomic stocks-in particular, Millennium, Human Genome Sciences, Applied Biosystems-they had these unbelievable valuations which never really were matched again, although they did end up being successful companies.  

Now, what we have today is very different. Stock valuations have climbed largely on the basis of record new drug launches, innovative drug launches, and sales results, so valuations are, today, I'd say, at the higher end of historical ranges, but not in bubble territory, they're still within the range.  

As an example, when you look at the largest six biotech companies, their current PE is around 24 times and when we look at the broader 10 year history we see a range closer to between 16 times and 29 times, so certainly at the higher end, but not above.  

Steven Halpern:  Now, BioShares has taken a fascinating approach to the sector by creating two distinct ETFs which split the sector into the higher risk clinical stage stocks as well as the companies that have already commercialized products, so let's look at the more speculative of the two; first, BioShares Biotechnology Clinical Trials ETF (BBC).  Could you tell our listeners a little more about this fund and its long-term objectives?

Paul Yook:  Absolutely.  We are the only ones who split the biotech group into really two distinct asset classes that we believe exist, so the BBC, as you mentioned, only invests in these earlier stage, typically smaller and more volatile companies that are involved in the clinical trial process but do not yet have an approved drug so they're not selling drugs today.  

Some investors like these earlier stage companies, some investors prefer later stage product companies.  The BBC gives investors the opportunity to invest purely in the typically smaller, earlier stage companies.  

These are pre-revenue and we think, see, a lot of investors like to invest in individual stocks, but as you know, individual stock investing in biotech can be very volatile and there are many losers and so we think a diversified basket approach is the best way to invest in the clinical trial stocks and that's why we created this fund.

Steven Halpern:  Could you highlight some of the top holdings in this fund or new stocks that you're interested in?  

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Paul Yook:  Yes. This is a rules-based fund and it is a passively managed fund. Up until about two or three weeks ago, the top holding was a company called Auspex, which was acquired by Teva (TEVA) for about $3 billion.  

Today the largest holding is a company called Esperion (ESPR), it's about 3.5% today; has a drug that actually just recently announced positive results in its Phase 2B trial, that's a mid-stage clinical trial, for a new novel cholesterol lowering agent.  

In this trial, it showed very favorable results when compared to Merck (MRK), Merck's blockbuster statin drug, Zetia.  That is the largest position.  

There's another area of focus that investors have today, there's a lot of talk about immuno-oncology, and CAR-T therapy, and T-cell receptors, and different areas that focus on activating the human's own immune system against cancers. There's a lot of excitement.  

Our BBC fund probably has the largest weight to these immuno-oncology stocks of any ETF today.  There are a number of these stocks in our funds, such as ZIOPHARM (ZIOP), Bluebird (BLUE), Kite Therapeutics (KITE), Five Prime (FPRX); these are just a few of them and so that's certainly an exciting area that has a lot of discussion among investors.

Steven Halpern:  Now the second specialized ETF you have is BioShares Biotechnology Products (BBP) and this ETF invests specifically in biotech companies that already have FDA-approved products on the market.  Could you tell our listeners a little about this fund?

Paul Yook: The BBP fund really is the other side of the equation from the BBC fund, so what we've done is we've taken the biotech universe and we've taken those typically larger and less volatile companies and  put them in the BBP fund.  
Really, the way we divide it is if there's a biotech company that has an approved drug that they're actively selling in the market-it's really been de-risked-investors don't have to worry as much about a clinical trial result essentially coming out with negative results, which is probably one of the largest fears in biotech investing.  

These companies typically have lower volatility, some of them actually have really good earnings growth and a handful of them, actually three companies, pay dividends.

This fund, the BBP, has around 35 stocks today, some of them you know are the larger companies like Gilead (GILD) and some of them are smaller, more emerging companies with new drugs on the market.  

Steven Halpern:  Could you highlight perhaps some of the holdings in the fund?

Paul Yook:  One of the largest holdings is a company called Dyax (DYAX); they have a drug called Kalbitor for a genetic disease called hereditary angioedema. It really is a big market today. Shire (SHPG) is the leader there.  

Dyax has a very interesting next generation drug which just reported some very powerful strong results and the stock has moved up on the basis earlier this year on that clinical trial.  

Another stock in the portfolio is called Anacor (ANAC) and they have a drug that they launched last year, in 2014, for nail fungus, it's a disease called onychomycosis and they have actually a next pipeline drug which is pretty interesting in a Phase 3 trial for eczema, skin rash.  

Of course, BBP also has the large-caps; this fund also has the large-cap stocks that investors are probably more familiar with like Gilead and Amgen (AMGN), and Biogen (BIIB), and Celgene (CELG).  

Steven Halpern:  A fascinating approach.  I really appreciate you taking the time. Again, our guest is Paul Yook of BioShares.  Thank you for joining us today.  

Paul Yook:  Thank you very much.

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