Featured Image

Biotech Exceeds Expectations, Delivering Outperformance While Markets Fall

  • Last week, the ALPS Medical Breakthroughs ETF (SBIO) rallied 3.66%, outpacing competing biotech ETFs and weak US equities indices as long-awaited breakthrough Alzheimer’s trial data elevated the biotech sector. Despite major macro headwinds for US stocks, SBIO’s small-to-mid-cap (SMID) biotech holdings focusing on later-stage drug trials continued to show their resilience and uncorrelated characteristics in a weak third quarter for US markets, rising nearly 9% while the S&P 500 dipped nearly 5%.

  • In a celebrated press release last week, Biogen (BIIB, not in SBIO) released promising Phase III trial data for its Alzheimer’s immunotherapy that reduced cognitive decline by 27% in patients by blocking (inhibiting) the production of amyloid plaque in the brain, once again putting the spotlight on the success of using immunotherapy antibodies to treat unmet medical diseases. SBIO immunotherapy company, Prothena Corp Plc. (PRTA, 1.57% weight*), soared over 97% on the news with its similar Alzheimer’s therapy expected to show results in 2023.

  • Other immunotherapy companies in SBIO developing different treatments for cancer, rare & orphan diseases, neurology, cardiology & hematology also rallied hard last week on the news. Akero Therapeutics Inc. (AKRO, 0.71% weight*) and Ideaya Biosciences Inc. (IDYA, 0.32% weight*) rose 31.42% and 23.31% last week, respectively, as both companies recently published breakthrough therapy data in nonalcoholic steatohepatitis - NASH (Akero) and eye cancer (Ideaya). Rocket Pharmaceuticals Inc. (RCKT, 0.58% weight*) also gained over 29% last week after announcing encouraging therapy data in pediatric patients with Danon Disease, where the disease leads to a weakened heart muscle. Furthermore, SBIO holding, Iveric Bio Inc. (ISEE, 1.17% weight*), specializing in eye disease treatments, jumped 18.34% last week on positive investor and Food and Drug Administration (FDA) sentiment for its immunotherapy inhibitor to treat Geographic Atrophy. Finally, Immunovant Inc. (IMVT, 0.36% weight*) gained 14% last week on positive analyst commentary around its immunotherapy portfolio to treat different autoimmune diseases.

* Weight in SBIO as of 09/30/2022

“Small-to-mid cap biotech stocks matter more than ever to general biotech indices, growing in the past 2-3 years in their weighting despite volatility. Further, valuations appear cheap right now based on peak sales multiples and discounted cash flows, representing very attractive entry points and affirmed by recent outperformance on growing innovation and market potential.”

– Cowen Biotechnology Team, September 30, 2022

Sentiment is Gaining Steam for SBIO’s Immunotherapy Holdings
  • The biotech industry has made considerable headway in life-saving drug development since the pandemic, although these underlying catalysts have been muddied by lackluster stock returns as interest rates have risen over the past year. Highlighting the innovation through increasing research and development in biotech, FDA approvals for new chemical entities (leading to breakthrough immunotherapy drugs) saw 25% growth in 2021, outpacing year-over-year growth dating back to 2017 and that is expected to continue in 20221. The forthcoming approval of BIIB’s effective Alzheimer’s immunotherapy treatment, likely in January 2023, reflects a milestone for immunotherapy research, in which 87% of SBIO’s holdings utilize immunotherapy in their portfolio of treatments2.

  • Per a Cowen report on small-cap biotech last week, “growing generalist exposure and involvement could kick off the next (biotech) sector rally on increased index weightings, long innovation cycles, and attractive valuations.” While fundamentals appear strong in terms of promising drug catalysts going forward for biotech, security selection remains important as ever. SBIO is focused on SMID-cap biotech companies with an emphasis on later-stage pipelines in the FDA clinical trial process, as well as companies that have at least 24 months of cash burn on hand. Per the Cowen report last week, the most important drivers of return in SMID-cap are mergers and acquisitions (M&A) and positive drug trials – SBIO’s holdings have historically been attractive merger candidates for their promising therapies and intellectual property, along with a strong cash balance.

Later Stage Biotech Pipeline Drugs Tend to Exhibit More Success

20221003-chart

  • Per Cowen, studies have shown probability of success rises in each stage of development for biotech pipeline drugs, favoring pipeline treatments in Phase II (15-50% probability of success) and Phase III (30-65% probability of success) of clinical trials.

  • SBIO’s direct exposure to later-stage FDA clinical trials differentiates itself from competing biotech ETFs that do not screen based on clinical trial stages, resulting in potentially higher relative risk for investors.

1 Source: Bloomberg, as of 09/30/2022, FDA Approvals for New Chemical Entities (NCE) (2021-2017) year-over-year growth
2 Source: Bloomberg, as of 09/30/2022

Performance Summary
  1 Week YTD 1 Y 3 Y
ALPS Medical Breakthroughs ETF (SBIO) 3.66% -28.79% -33.94% -4.73%
S-Network Medical Breakthroughs Index - TR 3.66% -28.34% -33.53% -3.49%
NASDAQ Biotechnology Index - TR 2.05% -19.76% -25.26% 23.00%


Source: Bloomberg L.P., as of 09/30/2022

Performance data quoted represents past performance. Past performance is no guarantee of future results so that shares, when redeemed, may be worth more or less than their original cost. The investment return and principal value will fluctuate. Current performance may be higher or lower than the performance quoted. For current month-end performance call 1-866-759-5679 or visit www.alpsfunds.com. Performance includes reinvested distributions and capital gains.

For standardized performance please click here.

Top 10 Holdings
Karuna Therapeutics Inc 4.15%   Cytokinetics Inc 2.51%
Ionis Pharmaceuticals Inc 3.46%   Cerevel Therapeutics Holdings Inc 2.42%
Ascendis Pharma A/S 3.17%   Intellia Therapeutics Inc 2.35%
CRISPR Therapeutics AG 2.81%   Mirati Therapeutics Inc 2.14%
Global Blood Therapeutics Inc 2.53%   Denali Therapeutics Inc 2.09%


As of 09/30/2022, subject to change

Important Disclosures & Definitions

An investor should consider the investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus containing this and other information, call 1-866-759-5679 or visit www.alpsfunds.com. Read the prospectus carefully before investing.

Shares are not individually redeemable. Investors buy and sell shares on a secondary market. Only market makers or “authorized participants” may trade directly with the Fund, typically in blocks of 5,000, 25,000 or 50,000 shares.

Performance data quoted represents past performance. Past performance is no guarantee of future results; current performance may be higher or lower than performance quoted.

All investments are subject to risks, including the loss of money and the possible loss of the entire principal amount invested. Additional information regarding the risks of this investment is available in the prospectus.

The Fund’s investments are concentrated in the pharmaceuticals and biotechnology industries, and underperformance in these areas will result in underperformance in the Fund. Investments in small and micro capitalization companies are more volatile than companies with larger market capitalizations. Companies in the pharmaceuticals and biotechnology industry may be subject to extensive litigation based on product liability and similar claims. Legislation introduced or considered by certain governments on such industries or on the healthcare sector cannot be predicted.

Companies in the pharmaceuticals industry are subject to competitive forces that may make it difficult to raise prices and, in fact, may result in price discounting. The profitability of some companies in the pharmaceuticals industry may be dependent on a relatively limited number of products. In addition, their products can become obsolete due to industry innovation, changes in technologies or other market developments. Many new products in the pharmaceuticals industry are subject to government approvals, regulation and reimbursement rates. The process of obtaining government approvals may be long and costly. Many companies in the pharmaceuticals industry are heavily dependent on patents and intellectual property rights. The loss or impairment of these rights may adversely affect the profitability of these companies.

The development of new drugs generally has a high failure rate, and such failures may negatively impact the stock price of the company developing the failed drug. Biotechnology companies may have persistent losses during a new product’s transition from development to production. In order to fund operations, biotechnology companies may require financing from the capital markets, which may not always be available on satisfactory terms or at all.

The Fund is considered nondiversified and as a result may experience greater volatility than a diversified fund.

The Fund employs a “passive management” - or indexing - investment approach and seeks investment results that correspond (before fees and expenses) generally to the performance of its underlying index. Unlike many investment companies, the Fund is not “actively” managed. Therefore, it would not necessarily sell or buy a security unless that security is removed from or added to the underlying index, respectively.

Year-over-Year (YoY): describes a percentage change data point determined by subtracting a data point from one year ago from the current data point and dividing by the data point from one year ago.

NASDAQ Biotechnology Index: designed to track the performance of a set of securities listed on The NASDAQ Stock Market (NASDAQ) that are classified as either biotechnology or pharmaceutical companies, and is a modified market capitalization weighted index.

S-Network Medical Breakthroughs Index: comprised of small and mid-cap stocks of biotechnology companies that have one or more drugs in either Phase II or Phase III of the US Food and Drug Administration (“FDA”) clinical trials.

One may not invest directly in an index.

ALPS Advisors, Inc. is affiliated with ALPS Portfolio Solutions Distributor, Inc.

ALPS Portfolio Solutions Distributor, Inc. is the distributor for the Fund.

Not FDIC Insured • No Bank Guarantee • May Lose Value

SMB000439 01/02/2023

Recent ETF Spotlights