Sep 01, 2017

XBI is Having Another Banner Year

By Michael Caldwell

XBI is Having Another Banner Year

XBI (SPDR Biotech ETF) has been strong recently, seemingly sparked by the $12 billion acquisition of a pre-revenue company. This is not the first time we’ve seen XBI dramatically outperform. In fact, since 2008, 2016 is the only year it underperformed, and five out of the seven positive years (2009 was 0.0%) have produced double-digit returns.

Exhibit 1: XBI Performance

Source: Bloomberg

A strong XBI has been driven by or coincided with strong fund flows. As is often the case with such data comparisons, spikes in one direction seem to precede a reversal, however, simplistically, money flows need to be net positive for sustained positive performance.

Exhibit 2: Equity Fund Flow Trends – Healthcare/Biotech Fund Flows vs XBI Performance

Source: Lipper, Factset, Raymond James Research

When XBI is strong and fund-flows are positive, cash hungry biotechs rush to raise equity capital given that their business models require substantial upfront cash burn.

Exhibit 3: XBI Annual Performance & Biotech Equity Financings

Source: Driehaus, Factset

Financing activity doesn’t line up perfectly with performance due to the processes required to line up financing, however a simple correlation between year-over-year growth in biotech equity financing and XBI performance suggests a relationship (*note: 2017 data through August are annualized for the purposes of comparison).

Exhibit 4: XBI Annual Performance & Year Over Year Change in Biotech Equity Financing

Source: Driehaus, Factset

Follow-on activity in 2017 is on-pace to exceed all but 2015 within the last 10 years, and we think the activity into year-end is going to be even stronger than the pace set by the first three quarters of this year given the breadth of outperformance we’ve seen since mid-year. XBI has gone from +14.4% through May to 42.0% through the end of August, and now that summer vacations are over we think companies that have been thinking about raising money through follow-on or IPO will move quickly to do so before the window of opportunity closes.

Exhibit 5: Biopharma Financing Data

Source: Driehaus, Factset

This information is not intended to provide investment advice. Nothing herein should be construed as a solicitation, recommendation or an offer to buy, sell or hold any securities, market sectors, other investments or to adopt any investment strategy or strategies. You should assess your own investment needs based on your individual financial circumstances and investment objectives. This material is not intended to be relied upon as a forecast or research. The opinions expressed are those of Driehaus Capital Management LLC (“Driehaus”) as of September 2017 and are subject to change at any time due to changes in market or economic conditions. The information has not been updated since September 2017 and may not reflect recent market activity. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Driehaus to be reliable and are not necessarily all inclusive. Driehaus does not guarantee the accuracy or completeness of this informa­tion. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

About Michael Caldwell

Michael Caldwell is a portfolio manager and a senior analyst on the US Growth Equities Team with a focus on the health care sector.

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