Many biotech stocks have struggled in 2023 despite a robust year for US drug approvals. As these new treatments begin to treat patients, some investors see better times ahead next year. “We’ve seen a lot of innovation,” said Dan Lyons, a portfolio manager in the healthcare group at Janus Henderson, explaining that he’s bullish on 2024 because it will be a time when new markets will be created. “This can be a great opportunity, assuming you invest behind the companies that have the right alignment of doctors, patients and payers to build a large market with an innovative new drug,” he said. This year began with the Food and Drug Administration’s approval of Leqembi, an Alzheimer’s disease treatment, and was capped 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 diseases and another entry into a new class of anti-obesity drugs, which have made headlines all year. “Unless you’ve planned a fattening program, 2023 is 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 we look forward to the prospect of lower interest rates in 2024.” The Federal Reserve has made three rate cuts for next year. When that happens, Canaccord Genuity said it expects a “strong rally in the biotech sector that rewards innovative, but riskier assets.” Until then, investors will focus more on proven clinical and commercial success stories, he said. M&A on the Rise Still, deal-making is already starting to fuel excitement. Janus’ Lyons said he has been encouraged by the pick-up in acquisitions in the sector, which he expects will help his recovery. “I think that will continue or accelerate next year, just as large-cap pharmaceutical companies have a real hole in their pipeline that they need to fill,” he said. In recent days, Bristol Myers Squibb has been on a year-end shopping spree, acquiring RayzeBio, a cancer-treatment radiopharmaceutical developer, 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 bid for Point Biopharma, another cancer drug company. Shares of RYZB 5D mountain RayzeBio doubled on Tuesday on its deal with Bristol Myers Squibb. Lyons highlighted AbbVie’s recent plans to buy Cerevel Therapeutics and ImmunoGen. AbbVie’s two deals also look to bolster its neuroscience and oncology pipelines. Janus was a large investor in ImmunoGen with more than 6%, according to filings with the Securities and Exchange Commission. AbbVie paid a 95% premium to ImmunoGen’s closing stock price before the deal was announced. Analysts 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 accelerated year-end supply is “a very healthy sign” for two important therapeutic areas: radiopharmaceuticals and cell therapy. Late-stage assets like RayzeBio command a premium, according to Miller. “Perhaps it’s no surprise that these are more attractive to big pharma, but it’s worth noting that earlier-stage players (which may boast differentiated targets, isotopes or other bells and whistles) have so far been passed over in favor of programs that have a) meaningful clinical data sets, versus b) well-validated targets,” Miller wrote in a research note. A case of technical movement While all these trends bode well for the group, technical factors are also in its favor, according to the chief technical officer BTIG’s Jonathan Krinsky Earlier in the week, he said the SPDR S&P Biotech ETF (XBI) was more than 30% off its recent lows, but still down more than 50% from its all-time high set nearly three years ago. He predicted that if the exchange-traded fund clears the $90 share price, as it did on Wednesday, it would signal the start of a new uptrend. XBI 5Y mountain Spdr S & P Biotech ETF over the past five years. Historical patterns are also favorable, Krinsky said. “Depending on the final week of the year, the Nasdaq Biotech Index could fall for a third year in a row,” he wrote in a research note. “In its history (back in ’93), it’s gone two years in a row twice (’96-’97 and ’01 to ’02). ’96 and ’97 were both under less than 0.50%, so basically 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 biotech names include Ambrx Biopharma, Apogee Therapeutics, Biohaven and Exelixis. ‘Oversold and cheap’ In a research note on Friday, Jefferies analyst Michael Yee said “a significant short squeeze” helped biotech stocks in the fourth quarter. “Investors may have moved from an ‘everything soon’ mentality to ‘things are probably oversold and cheap’ for 2024, especially if events go well,” Yee said. He favors Amgen because of its low valuation and potential upside if its experimental obesity drug shows positive data. Amgen shares have gained 9% in 2023. Yee expects obesity drugs, or incretins, to remain a “hot topic” because of the “enormous” size of the market. Many on Wall Street predict that sales of these drugs will grow to more than $100 billion a year by the end of the decade. “In 2024, the focus will shift to reimbursement and access and whether GLP1s can address other indications such as NASH (fibrosis baseline 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 on some anti-obesity drugs have shown that these drugs may be able to reduce the amount of fat in the liver. While this could be 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 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 think was an overreaction in a lot of these stocks that we’ve seen recover over the last few months,” said Lyons of Janus. 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 NASH-targeted therapy to hit the market. “We think this is going to open up a big new market because doctors are really eager to be able to offer something to their patients that targets the liver and addresses NASH,” Lyons said. Vertex Pharmaceuticals is another stock that has appeared on many biotech stock pick lists. The company is developing a non-opioid painkiller, and many analysts see a huge market for the drug if it’s successful. VRTX YTD mountain Vertex shares year to date “A lot of people are living with pain because they don’t have good options to manage their pain. So we’re really excited about alternative options,” said Lyons. Earlier this month, Leerink Partners raised its price target for Vertex to a higher yield of $485, up nearly 19% from Wednesday’s close. Analyst David Risinger said he expects the pain program could lead to top-line sales of more than $10 billion. “Although there are outstanding questions about the Ph2 results due to data disclosure and renal safety figures, … we view the overall results as highly encouraging,” he said. — CNBC’s Michael Bloom contributed to this report.
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