In 2019-2021, the US stock biotech once climbed to a high level, but then the bubble burst in 2022, and the stock price plummeted by a thousand miles.
However, as expectations for the Fed to cut interest rates at the end of last year gradually heated up, the industry became one of the biggest beneficiaries.
Since mid-October last year,$SPDR S&P Biotech ETF (XBI.US)$The cumulative increase was nearly 30%, under the umbrella of “Sister Mu Tou”$ARK Genomic Revolution ETF (ARKG.US)$The cumulative increase was more than 20%,$iShares Biotechnology ETF (IBB.US)$It also recorded a double-digit increase.$Ishares Trust U.S. Pharmaceuticals Etf (IHE.US)$That's an increase of over 6%.
It is worth noting that many medical stocks are quietly rising against the market, rare disease giants$Sarepta Therapeutics (SRPT.US)$In just eight trading days this year, it has accumulated a cumulative increase of more than 20%. The generic drug giant$Viatris (VTRS.US)$,$Teva Pharmaceutical Industries (TEVA.US)$Each recorded an increase of about 10%.
Furthermore, the US pharmaceutical giant$Eli Lilly and Co (LLY.US)$,$Merck & Co (MRK.US)$,$AbbVie (ABBV.US)$,$Vertex Pharmaceuticals (VRTX.US)$Then the company hit record highs one after another.
Looking ahead to 2024, will big pharmaceutical companies actually begin to “open warehouses and release food”? Can the industry's newfound optimism at the end of 2023 continue until 2024?
A wave of large-scale mergers and acquisitions of giants has emerged
A series of biotech mergers and acquisitions announced by major pharmaceutical companies have also contributed to a sharp shift in the industry climate.
According to a report by the world-renowned investment bank Stifel, due to Biotech's valuation reaching a reasonable range, the number of major pharmaceutical biotech acquisitions in 2023 is close to a record level, and it is expected that the number of mergers and acquisitions will continue to be high in 2024.
Notably, data from data provider LSEG Deals Intelligence shows that in the last month of 2023 alone, the scale of mergers and acquisitions of US-listed biotech companies promoted by pharmaceutical giants such as Abbvie (Abbvie), Bristol-Myers Squibb (BMS), and AstraZeneca exceeded 25 billion US dollars.
Judging from large-scale mergers and acquisitions that occurred at the end of 2023, major pharmaceutical companies are using acquisitions as an important strategy to cope with the “patent cliff” where major treatments are about to expire.
Furthermore, behind the rebound in biotech stocks in the last 2 months or so of 2023, there is no doubt that the Federal Reserve hinted that interest rates may be cut several times in 2024.
Market analysts in the US believe that
Last year, biotech stocks were too affected by macroeconomic conditions last year. Now, these conditions are improving, and biotech stock prices and corporate market capitalization are returning to historically normal levels.
Market opinion also suggests that biotech companies will be easier to raise capital, which is particularly important for companies that are still in the early and middle stages of the drug pipeline. Lower interest rates raise risk appetite and entice investors to bet on biotech companies for potentially higher returns.
What do analysts think?
Yu Keqing, a senior overseas pharmaceutical analyst at Societe Generale Securities, believes that the most important reason for the continuous pullback in the biotech sector in 2021 and 2022 was the tightening of liquidity due to external macroeconomic reasons, especially in the venture capital sector, which had a significant impact on the innovative drug sector. Since innovative drug companies often rely on external financing to drive the R&D and commercialization process, reduced liquidity has led to an increase in financing costs for these companies, which will also limit their ability to develop new drugs. Furthermore, investors may prefer less risky investments when liquidity is tight, thereby reducing investment in the innovative medicine sector.
According to the market view, at present, multiple favorable factors are gradually accumulating:
First, in the innovative pharmaceutical industry, major products have appeared frequently recently;
Second, after full digestion in the early stages, the overall valuation level of innovative drugs in the US stock market is still at an historically low level;
3. Investment and financing sentiment for innovative drugs has improved, and demand for mergers and acquisitions from major pharmaceutical companies will continue to explode over the next 1-3 years.
On the one hand, the FOMC interest rate hike process is nearing its end, and global investment and financing sentiment is picking up. On the other hand, big pharmaceutical companies are entering the end of the cycle, and there is an urgent need to expand pipelines or acquire mature biotech companies' pipelines. The momentum for innovation is strong. Currently, US biotech companies are cheap enough, and big pharmaceutical companies are very motivated to buy.
Morgan Stanley analysts also said that trading activity is expected to improve year over year in 2024 and then return to normal in 2025-2026 as the stock market rebounds and positive changes in most leading indicators of mergers and acquisitions.
Barclays Bank also pointed out that
Although the IPO market is still much colder than the boom of 2020 and 2021, biotech companies raised 27% more cash in 2023 than in 2022. Although the number of biotech company deals in 2023 was relatively low, at only 11, the scale of the deals being promoted was larger, and the average IPO size jumped from a previous high of US$220 million in 2022 to US$253 million.
The bank expects the IPO market to be “more active” this year, partly because there are more and more companies seeking to go public, and the prospects for falling interest rates “generally indicate a more positive capital market environment.”
Bank of America believes that the biotechnology and pharmaceuticals sector is expected to usher in a larger upward catalyst in 2024. The bank said,
The valuations in both sectors are attractive, with the price-earnings ratio of the pharmaceutical industry being 18 times and the biotech sector having a price-earnings ratio of 14 times. Furthermore, drug development is becoming more feasible due to the development of artificial intelligence.
Analyst Piper Sandler believes that
After another difficult year, there are signs that the biotech industry will begin to recover by 2024. The suspension of interest rate hikes will solve the biotechnology financing problem to a certain extent, and mergers and acquisitions are still active. The bank will also$Arrowhead Pharmaceuticals (ARWR.US)$,$Legend Biotech (LEGN.US)$,$Alnylam Pharmaceuticals (ALNY.US)$The three biotech stocks were listed as the preferred stocks for 2024 because their valuations are attractive and there are plenty of product launch channels.
However, Goldman Sachs warned that even if interest rates begin to fall, the industry will still face many challenges, including drug pricing reform and the US presidential election.
Editor/Somer