Don't Just Focus on AI! Biotech Stocks Are Rallying
Since the beginning of this year, $NVIDIA(NVDA.US$ has been leading a group of semiconductor and AI stocks to further rise in response to the breakthroughs in AI technology and a booming industry outlook. However, an increasing number of investors have started to fret over the potential risks behind the high valuations of AI stocks and are scouting for alternative investment opportunities. Some of them have shifted their focus to biotech stocks.
Since October 27th, $SPDR S&P Biotech ETF(XBI.US$ and $iShares Biotechnology ETF(IBB.US$ have risen by nearly 60% and 24% respectively. The former's return has even exceeded $PHLX Semiconductor Index(.SOX.US$'s 45%. This fully reflects the impressive performance of biotech stocks in the mainstream trend of AI, which is just as strong as that of semiconductor stocks.
Among the biotech stocks with a market cap exceeding $1 billion, $Janux Therapeutics(JANX.US$ and $Viking Therapeutics(VKTX.US$ have shown the strongest performance, surging over 350% since the beginning of this year. Following closely are $Arcutis Biotherapeutics(ARQT.US$ and $Vera Therapeutics(VERA.US$, both of which have also risen more than 200%. In addition, several other companies have seen their stock prices double since the start of this year. The detailed list of individual stocks is presented in the following chart:
Boosted by the hype surrounding COVID-19 vaccines and treatments, biotech stocks gained tremendous attention during the pandemic and reached their peak in February 2021. However, as the pandemic lost visibility and other economic and political concerns intensified, the sector entered a three-year decline. The tide turned positively from the end of 2023, with an increasingly active IPO market indicating this trend.
Overall, there are several reasons why the biotech sector could experience a significant revival in 2024: the upcoming Fed rate cut, relatively attractive valuations, accelerated industry innovation, and regulatory progress.
1. Fed rate cut: The capital-intensive nature of product development makes this industry highly sensitive to interest rates. As interest rates decline, financing costs in the biopharmaceutical sector are expected to drop significantly, thereby alleviating the problem of layoffs and downsizing of R&D and production lines. Furthermore, since the biotech industry is very growth-oriented, a substantial amount of cash flow is expected to materialize in the future, and high-interest rates can significantly suppress its valuation. As rates decline, the sector is poised to be one of the biggest beneficiaries.
2. Attractive valuations: According to Stifel data, as of February 2, 2024, the valuation of global biotech companies had declined by about 59% from the peak of February 8, 2021, in terms of enterprise value.
3. Accelerated industry innovation and successful commercialization: Weight-loss drugs and GLP-1 are undoubtedly the best examples of recent successful commercialization in the sector. According to FactSet, in 2024 alone, $Eli Lilly and Co(LLY.US$ and $Novo-Nordisk A/S(NVO.US$'s injectable drugs for treating type 2 diabetes and obesity are expected to generate $36.9 billion in sales. By 2028, sales of these four drugs are expected to nearly double to $68.8 billion. In addition to GLP-1, innovative changes and commercialization in the fields of genetic medicines, gene editing, genetics, neurology, and Alzheimer's disease are also highly anticipated.
4. Regulatory progress: In 2023, the US Food and Drug Administration approved several important new therapies for the treatment of difficult-to-treat diseases such as Alzheimer's disease, obesity, and sickle cell anemia. Crispr Therapeutics (CRSP) also received FDA approval for the first gene-editing drug based on CRISPR technology.
David Song, an investment partner at Tema ETFs said:
"We've never had three years in a row of down years for biotech; I think in 2024 we need to be a little more optimistic. We have to look at it as a glass half full."
The rising star of the weight-loss stock, $Viking Therapeutics(VKTX.US$, soared over 121% yesterday, with a cumulative rise of 357% this year, setting a new historical high.
On Tuesday, the company announced positive results from its Phase II trial of the weight-loss drug VK2735. Obese patients lost a maximum of 14.7% of their body weight after using the drug for 13 weeks. The company also emphasized that no weight loss plateau was observed during the 13-week trial. Although it is only a Phase II trial, VKTX's clinical data sends a signal that small and medium-sized biotech companies have the ability to pursue the weight-loss drug market. As a result, $Novo-Nordisk A/S(NVO.US$ and $Eli Lilly and Co(LLY.US$ once fell by more than 2% intraday yesterday.
In addition, the current wave of pharmaceutical mergers and acquisitions also helps to boost the stock prices of small and medium-sized biotech companies. The enormous pressure of patent cliffs (the impact of generic drugs), abundant cash flows, and cost-effective biotech valuations have prompted many large pharmaceutical companies to carry out mergers and acquisitions. In early January alone, several major acquisitions took place, including $Bristol-Myers Squibb(BMY.US$'s $14 billion acquisition of $Karuna Therapeutics(KRTX.US$ , $ROCHE HOLDING AG(RHHBY.US$'s $3.1 billion acquisition of Carmot Therapeutics, and $AbbVie(ABBV.US$'s approximately $18.8 billion completion of two major deals. Bristol Myers Squibb acquired $RayzeBio(RYZB.US$ for $4.1 billion, and $AstraZeneca(AZN.US$ acquired Gracell Biotechnologies for about $1.2 billion.
"Pharma is willing to overpay to get the highest quality asset; I expect a continued cadence of 10 to 20 large deals a year," said SR One's George.
However, some voices remain cautious about the biotech sector. Goldman's Shibutani warns that even as interest rates begin to decline, the industry will still face challenges, including drug pricing reform and the upcoming US presidential election.
Source: Financial Times, moomoo, Investor's Business Daily
By Moomoo News Irene
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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