Biotech stocks so far this year appear to be on the same bumpy ride they have endured for months, rising and falling as politicians make statements on addressing drug pricing. But traders in biotech may be overlooking one key factor: Domestic health-care spending is set to increase in years to come.
Health spending is expected to grow 1.3 percentage points faster than gross domestic product per year until 2025, according to the U.S. Centers for Medicare and Medicaid Services. The health share of GDP is expected to rise to 20.1 percent by that time, from 17.5 percent in 2014.
This is an integral theme for the biotech industry and health-care sector, said Chad Morganlander, portfolio manager at Washington Crossing Advisors, who is bullish on large-cap biotech.
"The general thematic for the health-care industry, not only biotech, over the next five years — and this is one of the reasons why I think investors are looking at this group — is that health-care spending is going to increase. Regardless of what you call the plan — the Obama plan, the Trump plan," spending will rise, he said Tuesday on CNBC's "Trading Nation."
Though he recognizes so-called headline risk associated with the sector and uncertainty in the biotech market, Morganlander maintains an overweight position on the sector. He recommends biopharmaceutical company Amgen, saying its valuation is depressed, though fair, at current levels.
Over the next five years, he sees health care — biotech, specifically — will outperform the S&P 500.
Two popular biotech exchange-traded funds, the iShares Nasdaq Biotechnology Index ETF (IBB) and the SPDR S&P Biotech ETF (XBI), fell Tuesday after President-elect Donald Trump told The Washington Post over the weekend that he would target pharmaceutical companies over drug pricing. The IBB and XBI closed 2 percent and 2.4 percent lower Tuesday, respectively.
"They're politically protected, but not anymore," Trump told the newspaper.
It wasn't the first time biotech names were pushed down by Trump's rhetoric around drug pricing. In an interview with Time magazine in December, Trump said he would "bring down" drug prices; the IBB fell nearly 3 percent after the interview was released.
Interestingly enough, Democrat Hillary Clinton spurred similar biotech stock spirals when she addressed tackling drug pricing on the campaign trail last year.
"It's funny," Stacey Gilbert, head of derivative strategy at Susquehanna, said Tuesday on CNBC's "Trading Nation." "If we were to go back to the election, the biggest risk to biotech was not a Republican sweep. It's fascinating to think what we'd be talking right now had it been a Democratic sweep. But I think a lot of what's being priced into biotech now is just the uncertainty surrounding it."
Biotech has been "one of those sectors that whips around a lot," Gilbert said.
"The interesting thing from our perspective that we see is that investors seem like they want to be bullish," she said, noting investors' appetite in the options market for buying biotech calls and call spreads.
"It's investors not willing to dump all of their money in just yet by using it through the ETFs or individual stocks, but really wanting some sort of position, thinking there is a possibility that the fundamentals may be good. The problem is, you just don't know what the next tweet's going to be, and that's obviously a big factor right now on biotech," Gilbert said, referring to Trump's use of Twitter to bash companies.
The weaker U.S. dollar may also be weighing on the biotech sector, according to Michael Block, chief strategist at Rhino Trading Partners.
"Certain sectors have a higher positive correlation with the stronger dollar, and those, not surprisingly, include transports, energy, financials, biotech, semiconductors, and retail. So if the dollar keeps falling, those could get dinged," Block wrote in a note Tuesday morning.
The dollar index was weaker Tuesday against a basket of currencies.