These ETFs House The Next Biotech Takeover Targets

Big news out of the biotechnology sector Monday as Amgen (NASDAQ:AMGN) has finally reached an agreement to acquire Onyx Pharmaceuticals (NASDAQ:ONXX) for $10.4 billion, or $125 per share. Amgen has long been pursuing Onyx so the former can bolster its lineup of cancer therapies.

It is easy to understand why Amgen tried so diligently to get its hands on Onyx. Cancer therapies are big business for biotech and traditional pharmaceuticals firms. In 2012, cancer drugs accounted for $84 billion in world-wide sales, second only to central nervous system treatments, the Wall Street Journal reported, citing EvaluatePharma.

Expect more biotech sector mergers and acquisitions activity focused on cancer drugs. About a quarter of industry deals greater than $100 million now involve cancer, more than any other disease, the Journal reported, citing J.P. Morgan Chase.

Some of the companies that could now enter the spotlight on news of Onyx being acquired include Celledex Therapeutics (NASDAQ:CLDX) and Ariad Pharmaceuticals (NASDAQ:ARIA). Celledex focuses on development and commercialization of several immunotherapy technologies for the treatment of cancer and other difficult-to-treat diseases, according to Minyanville.

Ariad is working on blood cancer and tumor therapies. Combined, the two companies do not even have a market value of $5.3 billion, indicating they could be had prices that cash-rich large-cap biotech and blue-chip pharma companies could easily digest.

The two stocks combine for 4.3 percent of the SPDR S&P Biotech ETF's (NYSE:XBI) weight. Onyx is also a top-10 holding in that ETF.

Array BioPharma (NASDAQ:ARRY) and Clovis Oncology (NASDAQ:CLVS) are two more cancer drug stocks residing in XBI that dwell nowhere near large-cap territory. Same goes for XBI holding Exact Sciences (NASDAQ:EXAS), another cancer drug stock. That trio represents nearly four percent of the ETF's weight.

Another ETF investors should monitor if biotech sector M&A heats up in earnest is not a health care fund at all. However, the PowerShares DWA SmallCap Technical Leaders Portfolio (NYSE:DWAS) does allocate 19.3 percent of its weight to the health care sector, second only to its 26 percent weight to discretionary names. More importantly, DWAS has a penchant for outperforming some larger small-cap ETFs.

Even for high-flying small-cap ETFs, it is hard to top the 29.6 percent DWAS has returned this year. Overall, DWAS is home to 35 health care stocks including Celledex and Clovis. Endocyte (NASDAQ:ECYT) is another maker of cancer therapies and is also found in the DWAS lineup.

Isis Pharmaceuticals (NASDAQ:ISIS) is one of the smallest DWAS health care components, but the company has potential exposure to the cancer drug boom and has previously been mentioned as a possible takeover target.

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