Investors see a biotech comeback in 2024 as rates fall, deal-making picks up. Stocks to watch – GWC Mag

Many biotech stocks struggled in 2023 despite a robust year for U.S. drug approvals. As these new therapies begin treating patients, some investors see better times ahead next year. “We’ve seen a lot of innovation,” Dan Lyons, portfolio manager on the health-care team at Janus Henderson, said, explaining that he is bullish on 2024 because it will be a period when new markets are being created. “That can be a great opportunity, assuming you invest behind the companies that have the right alignment of physicians, patients and payers to build a large market with an innovative new drug,” he said. This year began with a Food and Drug Administration approval for Leqembi, an Alzheimer’s disease treatment, and was capped off in December by approvals that included two separate gene therapies for sickle cell disease — a first in the field. Among the other innovations were treatments for cancer, some rare conditions and another entry into a new class of anti-obesity medications, which have grabbed headlines all year. “Unless you had an obesity program tucked away in your pipeline, chances are 2023 was a tough year with rising interest rates and intense competition,” Canaccord Genuity analyst John Newman said in a research note. “We expect this environment to continue but look forward to the prospect of lower interest rates in 2024.” The Federal Reserve has penciled in three rate cuts for next year. When that happens, Canaccord Genuity said to expect a “strong rally across the biotech sector rewarding innovative, but riskier assets.” Until then, investors will be more focused on proven clinical and commercial success stories, it said. M & A is picking up Still, deal-making is already starting to fuel excitement. Janus’ Lyons said he has been encouraged by the pickup in acquisitions in the sector, which he expects will aid its recovery. “I think that’s going to continue or accelerate into next year, just as large-cap pharmaceutical companies have a real hole in their pipelines that they need to fill,” he said. In recent days, Bristol Myers Squibb went on a year-end shopping spree , snapping up RayzeBio, a developer of radiopharmaceutical drugs for cancer treatment, for $4.1 billion on Tuesday and Karuna Therapeutics , a neuroscience drug developer, for $14 billion on Friday. AstraZeneca also said it would acquire Chinese biotech Gracell Biotechnologies , which focuses on CART-T cancer treatments, and Eli Lilly completed a tender offer for Point Biopharma , another cancer drugmaker. RYZB 5D mountain RayzeBio shares doubled Tuesday word of its deal with Bristol Myers Squibb. Lyons highlighted AbbVie’s recent plans to buy Cerevel Therapeutics and ImmunoGen . AbbVie’s pair of deals also look to strengthen its neuroscience and oncology pipelines. Janus was a large investor in ImmunoGen with a more than 6% stake, according to filings with the Securities and Exchange Commission. AbbVie paid a 95% premium to ImmunoGen’s closing share price ahead of the deal’s announcement. Analysts have said the rich price reflects the opportunity for ImmunoGen’s Elahere cancer treatment , which has quickly established itself as the standard of care for types of ovarian cancer. Evercore ISI analyst Jonathan Miller said the year-end rush of deals is “a very healthy sign” for two important therapeutic areas: radiopharma and cell therapy. According to Miller, the late-stage assets like RayzeBio are fetching a premium. “Perhaps no surprise that these are most attractive to large pharma, but worth noting that earlier-stage players (who might boast differentiated targets, isotopes, or other bells and whistles) have been so far passed over in favor of programs that have a) meaningful clinical data sets, against b) well-validated targets,” Miller wrote in a research note. A case for a technical move While all those trends bode well for the group, technical factors are also in its favor, according to BTIG’s chief market technician, Jonathan Krinsky. At the start of the week, he called out that the SPDR S & P Biotech ETF (XBI) was up more than 30% from its recent lows, but was still down more than 50% from its all-time high set nearly three years ago. He predicted that if the exchange-traded fund cleared a share price of $90, which it did on Wednesday, it would suggest that a new uptrend has started. XBI 5Y mountain Spdr S & P Biotech ETF over the past five years. Historical patterns are also favorable, Krinsky said. “Depending on the last week of the year, the Nasdaq Biotech Index could be down for third straight year,” he wrote in a research note. “In its history (back to ’93), it has been down two straight years twice (’96-’97 and ’01 to ’02). ’96 and ’97 were both down less than 0.50%, so essentially flat. In other words, the recent stretch is unprecedented and bodes well for at least an attempt at a decent year in ’24.” With a gain of more than 2% so far this week, the biotech index is now up 4.6% for 2023. BTIG’s buy-rated names in biotech include Ambrx Biopharma , Apogee Therapeutics , Biohaven and Exelixis . ‘Oversold and cheap’ In a research note Friday, Jefferies analyst Michael Yee said “a significant short squeeze” was helping biotech stocks in the fourth quarter. “Investors might have moved on from a ‘short everything’ mentality to ‘things are probably too oversold and cheap’ for 2024, especially if events play out OK,” Yee said. He favors Amgen due to its low valuation and potential upside if its experimental obesity drug shows positive data. Amgen shares have gained 9% in 2023. Yee expects anti-obesity medications, or incretins, to remain a “hot topic” due to the “huge” size of the market. Many on Wall Street predict sales of these drugs will rise to more than $100 billion annually by the end of the decade. “In 2024, focus will shift to reimbursement and access, and if GLP1s can treat other indications like NASH (key fibrosis data by early 2024), sleep apnea, and others,” he said. NASH, or nonalcoholic steatohepatitis, is a buildup of fat in the liver, which can lead to cirrhosis, liver failure and even the need for a transplant. Early data for some anti-obesity medications suggested that these drugs may be able to reduce the amount of fat in the liver. While this could be a positive for patients, it has hurt the value of some companies that specialize in liver disease. Among the stocks affected by this was Madrigal Pharmaceuticals . Its stock is down nearly 19% year to date, but the shares hit a 52-week low of $119.76 in late October. The stock closed Wednesday at $236.75. “It was an example of what we believe was an overreaction in many of these stocks that we’ve seen rebound over the last few months,” Lyons of Janus said. MDGL 6M mountain Madrigal shares over the past six months. Still a clinical-stage company, Madrigal is expected to receive approval for resmetirom in mid-March . If all goes as planned, it will be the first treatment targeting NASH to make it to the market. “We believe that this will open up a large new market because the physicians are really anxious to be able to offer something to their patients that is liver-targeted that addresses NASH,” Lyons said. Vertex Pharmaceuticals is another stock that has appeared on multiple lists of biotech stock picks. The company is developing a nonopioid painkiller, and many analysts see a vast market for the drug if it is successful. VRTX YTD mountain Vertex shares year to date “Many people live in pain because they don’t have good options to manage their pain. So we’re really excited about alternative options,” Lyons said. Earlier this month, Leerink Partners boosted its price target for outperform-rated Vertex to $485, which is nearly 19% higher than Wednesday’s close. Analyst David Risinger said he expects the pain program could drive peak sales of more than $10 billion. “Although there are outstanding questions about the Ph2 results due to data disclosure and renal safety figures, … we see the totality of results as highly encouraging,” he said. — CNBC’s Michael Bloom contributed to this report.