Biotech Outlook 2024: Analysts Believe the Biotech Sector is Poised for Recovery Next Year
Following a turbulent period, there has been a notable change in the trajectory of biotech stocks. After experiencing significant downturns in 2021 and 2022, the $SPDR S&P Biotech ETF (XBI.US)$ has seen an increase of 5.5% in the current year. However, it continues to trail considerably behind the $S&P 500 Index (.SPX.US)$, which has achieved a 24% gain. However, analysts indicate that the previously cool sentiment of investors towards the biotech sector is beginning to warm up, as signs of a change in attitude emerge.
A combination of an improved outlook on interest rates, an increase in transactional activity, and advancements in critical fields such as oncology and immunology are positioning the biotech industry for a more promising outlook in 2024:
• Anticipation of a Rate Cut
During the early phase of the pandemic, biotech firms experienced a surge in initial public offerings (IPOs) due to low-interest rates. However, this trend reversed as swift hikes in interest rates drove investors away from riskier small-cap biotech companies, slowed down deal activities, and increased borrowing costs for these companies.
Biotech stocks, especially smaller ones, depend heavily on debt financing for research in pursuit of breakthrough drugs. High interest rates set by the Federal Reserve make borrowing costlier, which can be detrimental to unprofitable biotech companies. The recent improvement in the biotech sector coincides with a shift in economic conditions that may lead the Fed to contemplate reducing interest rates rather than increasing them. Recent signs of a more cautious Federal Reserve may increase investor risk appetite, potentially swinging momentum back towards biotech, according to Leerink Partners analysts.
• The Return of Biotech M&A
Industry participants are gaining clarity on regulatory perspectives, which may lead to a resurgence of substantial transactions and the persistence of deals valued between $5 billion to $15 billion—a range that was typical in 2023, as noted in a recent PwC report.
The U.S. government's initiative to negotiate drug prices poses a threat to the future earnings of big pharmaceutical companies, urging them to seek new revenue streams as patents on best-selling medications approach expiration. This urgency is expected to rekindle activity in mergers and acquisitions. Despite a slow year with only 16 deals of $1 billion or more in the first nine months of 2023, as reported by Bloomberg Intelligence, recent successful large-scale acquisitions by $Pfizer (PFE.US)$ and $Amgen (AMGN.US)$, which faced fewer regulatory obstacles than anticipated, have raised hopes for a market rebound, according to Lis Agosto, a senior healthcare analyst at Global X, an ETF firm.
• Innovations in Key Areas
Analysts predict a prosperous 2024 for select biotech companies specializing in oncology, immunology, and metabolism. Leerink Partners endorses $Merus (MRUS.US)$ for their head and neck cancer drug, petosemtamab, and both Leerink and BMO Capital Markets recommend $Disc Medicine (IRON.US)$ for bitopertin, a treatment for rare photosensitivity disorders, with key trial data forthcoming.
Companies involved in metabolic diseases are also gaining analyst support, with GLP-1 drugs like Ozempic and Wegovy spurring interest. Viking Therapeutics Inc. is noted by Oppenheimer analysts for its oral obesity treatment, with trial results anticipated in the next year.
$Amgen (AMGN.US)$ is also seen positively for its work on obesity treatments, with a once-monthly injection and a pill in development. Despite trading at a lower valuation than industry leaders $Eli Lilly and Co (LLY.US)$ and $Novo-Nordisk A/S (NVO.US)$, Amgen is considered a rising contender in obesity and cardiovascular disease.
What Analysts & Experts Say
• Mike Perrone, a health-care specialist at Baird, sees room for a further comeback in medical-device stocks and biotechs.
Those are the two sub-sectors that have the greatest potential to improve specifically off the depressed levels they're at. If the economy's slowing, they want to get more defensive and health care is a great defensive sector."
• $Bank of America (BAC.US)$ analysts called out $BridgeBio Pharma (BBIO.US)$ and $Rocket Pharmaceuticals (RCKT.US)$ as some of their top picks ahead of key updates. Carnegie's Afzal sees promise in $Stryker Corp (SYK.US)$ and $Abbott Laboratories (ABT.US)$ as an aging demographic buoys the use of a range of devices.
• $Goldman Sachs (GS.US)$ analysts led by Asad Haider predict life sciences tools will outperform next year while health insurers and dental stocks face a tougher backdrop.
• Regarding biotech IPOs, Roel van den Akker, pharmaceutical and life-sciences deals leader at PwC, expresses a guarded optimism about the market opening up next year for firms with distinct scientific advancements and robust clinical evidence. He notes that due to the quiet IPO activity in 2023, many companies are currently waiting in the wings.
• Shams Afzal, a portfolio manager at Carnegie Investment Counsel, believes that obesity drug companies' stock prices reflect very high expectations, citing Lilly's high price-to-earnings ratio.
It very much remains the stock picker's market. If the broader market rally continues, health care is going do its fair share of heavy lifting to make up for 2023."
Source: Market Watch, Barron's, Yahoo Finance
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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