Biotech ETFs Rally on Merger News

The biotech stocks are hitting fresh new highs to start the week after the announcement of ye another multi billion-dollar deal. Pharmaceutical giant, Merck & Co MRK, has agreed to purchase Cubist Pharmaceuticals CBST an advanced antibiotic pharmaceutical company for $8.4 billion.

The deal breaks down to MRK paying about $102 a share, a 37 percent premium from CBST close on December 5^th. The deal was spurred by the recent rise in antibiotic resistant diseases in the U.S, a field where CBST already has a well-established and efficient pipeline with drugs on the market as well as some awaiting approval.

Highlighted below are a number of biotechnology ETFs that are moving after the announcement of the latest deal.

The iShares NASDAQ Biotechnology ETF IBB is made up of 118 NASDAQ listed biotechnology and pharmaceutical companies. The top individual holdings include Celgene Corp CELG making up 9 percent of the portfolio, Amgen Inc AMGN at 9 percent, and Regeneration Pharmaceuticals Inc REGN coming in at 8 percent. Newly acquired CBST makes up a small 1 percent of the biotech ETF. The ETF was up 2.4 percent in mid-day trading on Monday as investors digested the news. IBB is up 39 percent year to date and 27 percent over the last six months. The biotech ETFs has an expense ratio of 0.48 percent.

The First Trust NYSE Arca Biotechnology Index ETF FBT consists of 20 biotech companies that are involved with the process to develop products or provide services in the sector. The top holdings include Incyte Corporation INCY with a 4.4 percent holding, Alkermes Plc ALKS making up 3.9 percent, and ISIS Pharmaceuticals ISIS at 3.8 percent. CBST accounts for 3.3 percent of the ETFs portfolio. The ETF was up over 3 percent on the merger announcement and trading at a new all-time high. Since the start of the year the ETF is up 53 percent and 33 percent over the last six months. FBT has expense ratio of 0.60 percent.

The PowerShares Dynamic Biotechnology & Genome Portfolio PBE tracks 30 U.S. biotechnology and genome companies engaged in research, development, manufacture and marketing and distribution of various biotechnological products, services and processes. The top individual holdings include Biogen Idec Inc BIIB at 5.5 percent, Gilead Sciences Inc GILD making up 5.2 percent, and AMGN coming in at 5.1 percent. PBE does not have CBST as a holding but will benefit from the positive performance of the sector following the news of its acquisition. The ETF was up 1.2 percent at noon on Monday. The ETF is up 40 percent year to date and 19 percent over the last six months. The biotech and genome ETF has an expense ratio of 0.59 percent.

The merger and acquisition trend has been a theme in 2014 as many companies are using their large positions to acquire smaller rivals.  The trend has been particularly popular in the biotech arena as it makes more sense for the larger companies to buy already established drugs and promising pipelines versus spending large amounts of money on research and development. There is not reason why the trend will not continue into 2015, setting the stage for another strong year for the sector.