Excitement around new innovations has lit a fire under biotech stocks of late. While the Vanguard Health Care (VHT) ETF was up more than 28% year to date through Friday, it still doesn't match the more than 47% gain posted by the iShares NASDAQ Biotechnology Index (IBB) ETF. Some top-performing biotech stocks have included larger players like Celgene (CELG) and Gilead Sciences (GILD) up 88% and 67%, respectively, year to date, as well as emerging names like NPS Pharmaceuticals (NPSP), shares of which have more than tripled this year.
"The biotech industry has been pretty successful in bringing new products to market over the last few years and investors have recognized that in 2013," said John Sullivan, director of equity research and health care strategist at health care-focused investment bank Leerink Swann.
The Food and Drug Administration has played an important role in the industry's success, approving more new drugs in 2012 than in any year since 1996.
While some might say the FDA has become more permissive, Sullivan argued it has been "more transparent and communicative to drug sponsors," which he said "has benefited drugs and biotech companies in that they've been able to more reliably put the information in front of the FDA that the FDA needs to make a decision."M&A has been another factor driving the health care sector's strong performance. Thermo Fisher Scientific's (TMO - Get Report) acquisition of Life Technologies (LIFE), for example, and Warner Chilcott's (WCRX) sale to Actavis (ACT - Get Report) have both been lauded by investors. "Investors, I think, are responding to what they see as the benefits of consolidation in the specialty pharmaceutical industry and the likely earnings growth that can come as you eliminate redundant functions and things like that," Sullivan said. Another strong performing area within the sector has been health insurance. Once thought to have the most to lose from the Affordable Care Act of 2010, better known as Obamacare, health insurers have only added to strong gains they posted in 2012. Year to date through Friday, shares of UnitedHealth (UNH - Get Report) were up 36.53%, Cigna (CI) was up 51.20%, WellPoint (WLP) was up 43.28%, Aetna (AET) 40.6% and Humana (HUM) 39.35%. Leerink Swann's Sullivan said he believes the re-election of President Obama in 2012 and the Supreme Court's decision last year to uphold the main provisions of the health care reform law have boosted the stocks.