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A more favorable interest-rate outlook, an uptick in deals, and innovations in key areas like cancer and immunology are setting up biotech for a brighter 2024, analysts say. 

That would give investors some welcome relief after three tough years for the sector. In the wake of steep declines in 2021 and 2022, the SPDR S&P Biotech exchange-traded fund
is up 5.5% so far this year but still lags far behind the S&P 500’s
24% gain. A boom in biotech initial public offerings that started early in the pandemic, when interest rates were low, reversed course as rapid-fire rate increases pushed investors away from riskier small-cap biotechs, put a damper on dealmaking and raised companies’ borrowing costs. This year through mid-December, 67 biotech stocks were delisted, up from 27 in 2022, according to BMO Capital Markets. 

But investors’ chilly attitude toward the sector is showing signs of thawing, analysts say. With the Federal Reserve lately taking a more dovish stance, investors’ risk appetite should rise, and “the pendulum could swing back to biotech,” analysts at Leerink Partners wrote in a report this week. 

The sector also seems to be shaking off the regulatory anxieties that put the brakes on dealmaking earlier this year. Some significant deals have been completed in recent months despite regulatory scrutiny, with Amgen Inc.
completing the Horizon Therapeutics acquisition that had been challenged by the Federal Trade Commission and Pfizer Inc.
closing its acquisition of Seagen after securing the regulator’s go-ahead.

Given the limited success of regulatory challenges this year, “people have recalibrated to the new reality” of a more active regulator, said Roel van den Akker, pharmaceutical and life-sciences deals leader at accounting and consulting firm PwC, and “have gained a bit more comfort around this issue.”  

What’s more, big pharmaceutical companies with sizable piles of cash and the need to address patent expirations on some top-selling products later this decade will be hunting for companies with innovative drugs in development, van den Akker said. Combining that demand with the supply of innovation in biotech, “you have a fairly healthy setup” for biotech mergers and acquisitions in 2024, he said. 

Underscoring the trend, Bristol Myers Squibb Co.
on Friday announced a $14 billion deal to buy Karuna Therapeutics Inc.
which has a key schizophrenia treatment in development.

As industry players get a better handle on regulators’ thinking, there may be a return of larger deals, as well as continued deals in the $5 billion to $15 billion range commonly seen in 2023, PwC said in a recent report. Likely targets include companies focused on precision oncology, cell and gene therapies, mRNA and immunology, analysts say. Major pharmaceutical companies are also shopping for diabetes and obesity assets, as seen in recent deals struck by Roche Holding AG
and AstraZeneca PLC

Companies widely seen as potential acquisition targets include Vertex Pharmaceuticals Inc.
which is developing a non-opioid treatment for acute pain; Blueprint Medicines Corp.
which specializes in precision cancer therapies; and BioMarin Pharmaceutical Inc.
which focuses on treatments for genetic conditions, according to a recent BMO Capital Markets report. 

Beyond any potential deals, analysts see a strong 2024 for some select companies in targeted oncology, immunology and metabolism. Leerink Partners analysts like Merus N.V.
whose petosemtamab is a “potentially best-in-class” treatment for head and neck cancers, the analysts wrote. 

Disc Medicine Inc.
is a top pick among analysts at Leerink as well as at BMO Capital Markets. The company is developing bitopertin for erythropoietic porphyrias, a group of rare and potentially life-threatening diseases that can cause hypersensitivity to sunlight. Following “impressive” interim results earlier this year, placebo-controlled-trial data on bitopertin are expected early next year, the BMO analysts wrote. 

Buoyed by popular GLP-1 drugs like Novo Nordisk’s
Ozempic and Wegovy, some companies focused on metabolic diseases are also among analysts’ favorite stocks for 2024. Viking Therapeutics Inc.
for example, is a top pick among Oppenheimer analysts. It’s working on an oral obesity treatment with trial data expected in the first quarter of next year.

Some analysts also see a bright 2024 for Amgen Inc.
which is working on a once-monthly injection as well as a pill for patients with obesity. The company is “an emerging leader” in obesity and cardiovascular disease, and the stock trades at a discount to dominant players Eli Lilly & Co.
and Novo Nordisk, Oppenheimer analysts wrote in a recent report.

As for biotech IPOs, van den Akker said he’s “cautiously optimistic the window will reopen” next year for companies that have truly differentiated science and strong clinical data. Given the subdued IPO market in 2023, he said, “there are plenty of companies sitting in the green room.”

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