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ETF Specialist

An ETF for This Lagging Sector

Biotech companies' returns have diverged from the broader market in recent weeks amid concerns over greater regulation and price discounting.

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The U.S. biotechnology sector has enjoyed an impressive run during the past decade. The industry has dramatically outperformed the broader market over that time frame and also had a tremendous 2013. Large-cap biotech firms have fueled this rally, as they have scored key drug approvals, reaped strong sales from already-approved drugs, successfully integrated acquisitions, and benefited from a favorable regulatory environment. The sector also has seen valuations surge from merger and acquisition activity, as large pharmaceutical firms have sought to spruce up relatively empty drug pipelines by buying innovation in the form of biotech firms.

The biotech sector's performance has hit a bit of a lull during the past three months, with exchange-traded funds devoted to the biotech sector sliding anywhere from 8% to 20%, even as the broader market has risen nicely. The sector has been pressured by pricing concerns that were sparked by  Gilead Sciences' (GILD) launch of a popular hepatitis drug. That release sparked congressional interest in justifying the pricing for the drug. In addition, a large pharmacy benefit manager began openly discussing restricting the use of that drug once competition enters the market late this year. Those two actions sent ripples throughout the entire industry, making investors fearful of potentially increased governmental regulations on pricing and PBMs' increased leverage for discounting in the private market.

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Robert Goldsborough does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.