Biotechnology sector, which includes the fast-growing companies in the health care world, are easily crushing the overall market and broader health care sector so far this year. This is especially thanks to a wave of mergers and acquisitions, encouraging trends as well as the new tax legislation.

Mergers & Acquisitions

Recent mergers and acquisition talks/rumors have given a boost to biotech stocks. Celgene Corp (CELG – Free Report) has agreed to buy Juno Therapeutics Inc. (JUNO – Free Report) for $87 per share in cash, or $9 billion, while Sanofi (SNY – Free Report) announced a deal to acquire Bioverativ (BIVV – Free Report) for $11.6 billion.

Given the flurry of deals so far, M&A activity in the biotech sector is expected to be robust this year. EY expects the deal value to exceed $200 billion, given companies’ increased financial firepower and balance sheet strength.

Encouraging Trends

The industry is clearly benefiting from solid corporate earnings, promising drug launches, faster drug approvals, cost-cutting efforts, an aging population, ever-increasing healthcare spending, expansion into emerging markets and Trump’s tax reform. In particular, the new tax legislation has enticed companies to bring offshore cash back home at reduced tax rates of 8-15.5% instead of the prior 35%. The repatriated money could be used for share buybacks, dividends, acquisitions and capital spending.

Additionally, the sector’s non-cyclical nature is an advantage in the current environment, where concerns over higher inflation and the resultant increase in interest rates are on the rise. Geopolitical tensions, Washington turmoil as well as the prospect of an end to the worldwide cheap money policy era is also compelling investors to move toward defensive sectors like health care.

How to Play?

All these developments are fueling growth in the biotech companies, leading to a rally in their share prices and impressive levels of momentum in biotech ETFs. This suggests that a tilt toward biotech is definitely a good idea.