On Nov 14, major biotech players plummeted more than 5% on average. This pushed the sector to its lowest level in the recent past. Following this decline, iShares Nasdaq Biotechnology ETF (IBB) and SPDR S&P Biotech ETF (XBI) tanked 11.5% in intraday trade, the sharpest fall since October.

However, this decline is momentary as investors have only rotated out of biotech to tech stocks as that seemed prudent. Also, this was more of a correction than a decline and investors should buy this dip.

Further, biotech stocks have rallied throughout 2017, emerging as one of the top performers this year. In fact, the iShares Nasdaq Biotechnology ETF (IBB) has rallied 17.1% year to date. Moreover, biotech majors have demonstrated strength despite challenges like rising competition, pipeline setbacks, slowdown in growth of mature products and generic competition for certain key drugs.

Moreover, the drug pricing issue has ebbed and there are high hopes from Trump’s one-time tax repatriation which is slated to improve things further for the sector. Republicans have been trying hard to get the reforms implemented and there is a high possibility that we might find the new tax code by the next year. So there is no reason to shy away from biotech mutual funds.

Drug Pricing Issue Has Ebbed

Healthcare was hit hard before the election on the price-gouging issue which was first raised by Hillary Clinton in September 2015. She had tweeted about "price gouging" and framed a proposal to combat skyrocketing drug prices.

In March, President Donald Trump took this a little further and tweeted about increasing competition and how he wants to lower drug prices himself, sending fresh shockwaves across the industry. He had tweeted that his team was working on a ‘new system’ which would involve competition in the Drug Industry. Since this tweet, Trump has never commented publicly about drug pricing.

Also, Trump's pledges to reduce FDA regulations, remove taxes and fees on pharmaceutical and medical-device manufacturers, and successful clinical trials for new drugs may prove to be a boon for the space. Meanwhile, some other factors that should continue having a positive impact on pharma and biotech stocks are new product sales ramp up, R&D success and innovation, strong results, a higher number of FDA approvals, and continued strong performance from legacy products.

Biotech Stocks Rally on Hopes of Tax Cut

On Nov 16, the House of Representatives finally passed the tax cut legislation, now named the Tax Cuts and Jobs Act. Members of the GOP remained positive about the how the Bill would actually improve the overall economy. House Speaker, Paul Ryan even commented that the legislation would result in more jobs, increased wages and above all, higher take-home pay. The Bill reduces the corporate tax rate to 20% from the current 35%.

The proposed tax reforms, if approved, will leave more cash in the hands of biotech companies. The cash can be invested for mergers/acquisitions, which have been relatively fewer this year than the last. It goes without saying that significant uncertainty regarding the timely passing of the U.S. tax reform has cast a pall over the future of the biotech sector.

A lot of large biotech companies, have, in the recent past engaged in tax inversion in a bid to increase their revenue. Tax inversion refers to an indirect evasion of taxes which involves shifting the headquarters outside of the borders of the United States. An unwelcome development for such companies which utilized tax inversion practices is that they would now have to pay higher taxes.

Per the new rules regarding tax evasion, such companies would now have to pay 20% excise tax for any payment within the company. However, the cut in taxes is likely to lure them back into the domestic territory, tackling this problem at the very root itself.

More Investments in Pipeline for 2018

Major biotech companies have gained primarily because of prospects of tax reforms, which would leave them with more cash for research and development, and mergers and acquisitions. Secondly, there has been a major boost in the number of FDA approvals in 2017, which has led to the development of newer products.

This year has been largely successful for the sector, making it costlier for companies to engage in such deals. This is evident from the fact that there have been no major mergers this year save for Gilead Sciences, Inc. (GILD - Free Report) acquisition of Kite Pharma, Inc.on Aug 28 for $11.9 billion in cash. However, things are likely to change next year after the tax reforms are implemented.

3 Major Biotech Picks

Here, we have highlighted three biotechnology mutual funds boasting a Zacks Mutual Fund Rank #1 (Strong Buy). Moreover, these funds have encouraging one-year and YTD returns. Additionally, the minimum initial investment is within $15000 and net assets are above $50 million.

With the drug pricing issue long gone, the biotech stocks are poised for growth. Moreover, members of the GOP are breaking a sweat to push through the reforms makes it somewhat evident that tax reforms might be implemented. Also, Trump’s one-time tax repatriation would make it cheaper for the large biotech companies to bring the profits held overseas back home. Such developments would also lead to more investments in R&D as well as a larger number of mergers and acquisition deals going through. Under such circumstances we suggest you consider investing in biotech mutual funds.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

Franklin Biotechnology Discovery A (FBDIX - Free Report) invests the lion's share of its assets in securities of companies from the biotechnology domain. The fund may invest a maximum of one-fifth of its assets in equities as well as debt securities of U.S. and non-U.S. biotech companies. FBDIX is a non-diversified fund.

FBDIX has an annual expense ratio of 1.02%, which is below the category average of 1.32%. The fund has one-year and YTD returns of 4.1% and 12.9%, respectively.

Fidelity Select Biotechnology (FBIOX - Free Report) invests the majority of its assets in securities of companies principally engaged in the research, development, manufacture and distribution of various biotechnological products. The fund invests in domestic and foreign issuers.

FBIOX has an annual expense ratio of 0.74%, which is below the category average of 1.32%. The fund has one-year and YTD returns of 11% and 23.5%, respectively.

ProFunds Biotechnology UltraSector Inv (BIPIX - Free Report) seeks daily investment results that correspond to 150%, before fees and expenses, of the performance of the Dow Jones U.S. Biotechnology Index. The fund primarily invests in biotechnology companies.

BIPIX has an annual expense ratio of 1.45%, which is below the category average of 2.00%. The fund has one-year and YTD returns of 22.2% and 31.4%, respectively.