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Merger Mania Heats Up Biotech Last Week

  • Last week, the ALPS Medical Breakthroughs ETF (SBIO) rallied 14.53% on positive earnings and two significant M&A announcements in the portfolio. SBIO’s small-to-mid (SMid) cap holdings have been beaten down year-to-date (YTD) but, as history suggests, depressed valuations in the space ignited a wave of mergers and acquisitions (M&A) last week, leading SBIO to outperform its competitors and broader equities markets.

  • SBIO’s stellar week was led by the headline news of immunotherapy company, ChemoCentryx Inc. (CCXI, 1.79% weight*), gaining a scorching 113.89% after Amgen Inc. (AMGN, not in SBIO) announced it would acquire the company for $3.7 billion, or a 115% premium to its prior day close. The deal highlights CCXI’s immunotherapy portfolio to treat inflammatory diseases and cancer. Global Blood Therapeutics Inc. (GBT, 2.07% weight*) also sent M&A shockwaves through SMid cap biotech last week on reports the company, who produces a recently-approved immunotherapy for sickle-cell disease, may be acquired by Pfizer Inc. (PFE, not in SBIO) for an estimated $5 billion, or a 118% premium to its prior day close.

  • A strong earnings report drove cancer-focused company, Day One Biopharmaceuticals Inc. (DAWN, 0.73% weight*), to rise 38% last week on earnings that showed expanded development of its immunotherapy to treat solid tumors and relapsed pediatric low-grade glioma. Additionally, Agios Pharmaceuticals Inc. (AGIO, 0.81% weight*) rose nearly 38% last week after reporting strong launch revenues for its immunotherapy to treat anemia, while Aldeyra Therapeutics Inc. (ALDX, 0.20% weight*) gained over 37% last week after reporting strong progress on its drug pipeline to treat eye diseases. Also propelling SBIO higher last week was T-cell immunotherapy company, Allovir Inc. (ALVR, 0.25% weight*), which rose over 69% on encouraging earnings and data milestones, while Compass Pathways Inc. (CMPS, 0.43% weight*) jumped 28.74% on encouraging progress in using psilocybin to treat depression.

“Biotech is the one sector of the stock market that can go from absolutely hated to FOMO [fear of missing out] virtually on a dime...Fundamentals that drive the sector such as data releases and M&A are starting to trend unequivocally positive.”

– Brad Loncar, Loncar Investments, August 4, 2022

Immunotherapy is What Sets Biotech Apart from Other Growth Stocks
  • US biotech has been unloved in 2022, falling along with other growth stocks as financial conditions tighten. Despite lower biotech valuations from multiple compression on growth stocks, over 85% of SBIO’s holdings* are focused on immunotherapies, for which significant medical advancements are occurring within cancer and rare & orphan diseases. The news last week surrounding acquisitions of immunotherapy companies, ChemoCentryx and Global Blood Therapeutics, may serve as a strong catalyst for SBIO’s immunotherapy portfolio.

  • Although the number of deals across US biotech in 2022 has fallen short of 2021 numbers, the dollar-volume of deals has already surpassed 2021 levels at $11.44 billion, signaling biopharma giants have taken a more targeted approach within immunotherapy by also focusing on measurable M&A synergies. Most important to note for SBIO and US biotech is that the average premium paid for the target company in 2022 is a whopping ~154%, clearly highlighting the broad undervaluation for breakthrough biotech names and the synergies that can exist.
20220808-chart

  • Across US Biotech in 2022, the average premium paid over the share price is nearly 3X that of the 5-year average (2017-2021).

  • YTD, SBIO has benefitted from six announced holdings acquisitions in the fund, with the recent Global Blood acquisition excluded until the official announcement (made on Monday, August 8, 2022).

Performance Summary
  1 Week YTD 1 Y 3 Y
ALPS Medical Breakthroughs ETF (SBIO) 14.53% -19.21% -24.17% 1.42%
S-Network Medical Breakthroughs Index - TR 14.54% -18.75% -23.70% 2.67%
NASDAQ Biotechnology Index - TR 6.83% -11.37% -22.43% 32.46%


Source: Bloomberg L.P., as of 08/05/2022

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 click here. Performance includes reinvested distributions and capital gains.

For standardized performance please click here.

* Weight in SBIO as of 08/05/2022

Top 10 Holdings
Ionis Pharmaceuticals Inc 3.23%   Mirati Therapeutics Inc 2.39%
CRISPR Therapeutics AG 3.14%   Intellia Therapeutics Inc 2.38%
Cerevel Therapeutics Holdings Inc 2.47%   Novavax Inc 2.35%
Ascendis Pharma A/S 2.44%   Zai Lab Ltd 2.21%
Arrowhead Pharmaceuticals Inc 2.42%   Cytokinetics Inc 2.20%


As of 08/05/2022, 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.

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.

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SMB000432 11/07/2022

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