Pharma and biotech stocks, led by Eli Lilly, Biogen and Crispr, are setting up for significant gains as the new year begins, fueled by multibillion-dollar deals, upbeat clinical results and cutting-edge medical advances like CRISPR gene-editing hitting prime-time.
The promise for a bright 2024 comes after roughly two years of abysmal performance. Biopharma stocks have taken a hit from the potential impact of upcoming Medicare drug price negotiations. Big Pharma also is bracing for a looming patent cliff that's expected to rock the industry later this decade.
Now there are reasons to be optimistic, analysts say.
David Song, an investment partner at Tema ETFs, is "cautiously optimistic" about the macro factors facing biotech stocks in 2024. Kyle Rasbach, who manages the Healthcare & Life Sciences fund at Eventide Asset Management, says "We are closer than ever to a more amenable environment for biotech."
The tide is starting to change, Arrowhead Pharmaceuticals Chief Executive Christopher Anzalone declared.
"I don't know if that means we are going to have the wind at our back in 2024, but it's feeling, increasingly, like at the very least we're not going to have wind at our face," he told Investor's Business Daily. "Some of these incredible breakthroughs that we've seen over the last couple years ... will start to take shape in 2024. It feels like a very important year for biotech."
Biotech Stocks Pulled Ahead In December
Biotech stocks surged to a high point in early 2021, driven by hype surrounding new Covid vaccines and treatments. But as the pandemic lost the limelight, so too did shares of biotech companies.
From early 2021 through a recent low in October 2023, IBD's 756-company Medical-Biomed/Biotech industry group pulled back more than 60%. The SPDR S&P Biotech exchange-traded fund has trended along the same line. After topping out at 174.79 in February 2021, XBI pulled back 63% through the end of October. From that low, shares of the IBD biotech group and the ETF bounded 31% and 40% higher, respectively, in November and December.
Anzalone, Arrowhead's CEO, says it's not that the science wasn't there to boost biotech stocks over the last two years. But good science didn't reap any rewards from Wall Street.
December proved to be a turning point. That was when both the industry group and the XBI popped by double digits.
The month saw four big takeovers, including Bristol Myers Squibb's acquisition of Karuna Therapeutics for $14 billion and Roche's $3.1 billion buyout of Carmot Therapeutics in the red-hot obesity space. AbbVie spent roughly $18.8 billion on two large deals in a span of just seven days. In the last days of the month, Bristol Myers offered $4.1 billion for RayzeBio and AstraZeneca snapped up Gracell Biotechnologies for about $1.2 billion.
That momentum continued in early January. On the first day of the annual J.P. Morgan Healthcare Conference in San Francisco, Calif., Johnson & Johnson, Merck and Novartis joined the melee. The conference is well-known for splashy takeover deals and this year didn't disappoint.
J&J is buying Ambrx for $2 billion, while Merck is putting down $860 million for Harpoon Therapeutics. Both companies are focused on cancer treatments with Ambrx in the targeted chemotherapy class — antibody drug conjugates — and Harpoon looking to wrangle the power of the immune system with its T cell activators. Privately held Calypso Biotech, which snagged the Novartis deal, is testing out treatment for autoimmune diseases.
Then there were the gains on the regulatory front.
Crispr Therapeutics won Food and Drug Administration approval for the first gene-editing drug based on CRISPR technology. Shares whipsawed lower, but are making a comeback. Vertex Pharmaceuticals scored a win in non-opioid pain treatment and Moderna stock rocketed on the promise for its Merck-partnered cancer vaccine in melanoma patients.
Rob Etherington, CEO of Clene Nanomedicine, which is focused on neurodegenerative diseases, says he expects attention to turn back to biotech stocks in 2024. But Olema Oncology CEO Sean Bohen cited a key reminder for investors about biotech.
"You need a bit of a memory reset that fast drug development isn't easy," he told IBD. "But it is a good business opportunity."
The Weight-Loss Drug Bonanza Continues
New opportunities have emerged in an important arena: weight loss. The market for obesity treatments has taken Wall Street by storm.
The first days of the new year saw important news from Eli Lilly and Novo Nordisk in the obesity space. Eli Lilly launched a direct-to-consumer website to hook patients up with independent doctors, support and drug delivery from third-party pharmacies. Novo teamed up with Omega Therapeutics to investigate another means of treating obesity and with privately held Cellarity to tackle a form of steatohepatitis tied to obesity.
In 2024 alone, injectable drugs from Lilly and Novo that treat type 2 diabetes and obesity are expected to bring in a combined $36.9 billion in sales, according to FactSet. By 2028, those four drugs are projected to nearly double to a total $68.8 billion in sales.
Novo Nordisk is on the IBD Leaderboard list of leading growth stocks. On a technical basis, Novo stock Thursday broke out of a base on base with a 105.69 entry. The 5% buy range goes to 110.97.
Eli Lilly is an IBD SwingTrader stock. Lilly stock shot up 4% Wednesday after regaining its 50-day line Tuesday. The stock is forming a flat base with a 629.97 buy point. It closed Friday at 618.55.
Structure Therapeutics CEO Raymond Stevens says Lilly and Novo have the injectable space for type 2 diabetes and obesity "pretty much locked up." But there's still plenty of room for biotech companies to make a move in the market, he said.
It's clearly a competitive arena. Structure Therapeutics stock plummeted 43% on Dec. 18 after unveiling early-stage test results that showed it trailing Eli Lilly in obesity treatment.
"We need to continue working," Stevens said, noting investors hoped for more weight loss in diabetic patients. Those patients lost 3.26% to 3.51% more weight than placebo recipients over 12 weeks vs. a 5% to 6% weight loss in Lilly's study. In another Lilly study, patients lost up to 7.1% more weight than the placebo group.
But Stevens says Structure's drug looks tolerable enough to increase the dosage and, potentially, the amount of weight lost. Approaches like that will be key to making a dent in the market for GLP-1 drugs — the mechanism behind Novo's Wegovy and Ozempic and Lilly's Mounjaro and Zepbound.
Simeon George, CEO of SR One, a venture capital firm, says blazing a new trail is important in this competitive market.
"From a venture capital standpoint, to go up against the Goliaths, you have to have a focused effort on differentiation," he told IBD in an interview. "How can you differentiate against the marketed products?"
Which Biotech Stocks Can Break Into Obesity?
For example, companies have numerous ways to break into the diabetes and obesity space with the same tried-and-true GLP-1 approach, experts say.
Besides launching oral medicines, companies can look to improving the quality of weight-loss treatments. In general, drugs that target the GLP-1 hormone strip away muscle in addition to fat. Losing muscle mass makes it hard to maintain weight loss after stopping treatment.
This underlines the challenges faced by biotech companies looking into obesity treatment.
Eli Lilly is already tackling the muscle-mass problem, teaming up with BioAegis Therapeutics to test a compound that would improve muscle mass in conjunction with GLP-based weight loss. Structure is also looking at this problem with another drug to target a hormone called apelin.
Arrowhead's Anzalone sees the company's efforts in using RNA interference in adipose, or fat, tissue as a means to move into the obesity market, while Biohaven is taking a myostatin-based approach to muscle growth. Myostatin is a protein found in muscles. The approach has shown promise in spinal muscular atrophy.
Ultimately, Vijay Pande, a general partner at venture capital firm Andreessen Horowitz, expects an entire ecosystem to emerge around obesity drugs.
"It's the biggest preventable disease with the most comorbidities," he told IBD.
Genetic Medicines Enter Prime-Time
Investors in biotech stocks are also closely following the gene-editing space after Crispr Therapeutics and Vertex won FDA approval for their sickle cell disease treatment, Casgevy. At $2.2 million a pop, it's expected to be a one-time treatment for the devastating blood disease.
John Evans, chief executive of Beam Therapeutics, says the market largely expected Casgevy to cross the finish line. Beam is working on a next-generation version of gene editing called base editing.
"To really see it happen is thrilling," he told IBD. "It's a watershed moment for the field and for medicine and it will absolutely elevate gene editing in the minds of the more general public and the investor audience. That will be a big deal. We would absolutely expect increasing attention and for people to understand this steady march of progress."
But there's an important caveat: It will likely be a slow launch for the space.
About 70,000 to 100,000 sickle cell patients are in the U.S., according to the American Society of Hematology. But not all of them will be able to withstand the process of gene editing, which involves removing and editing a patient's own stem cells. Patients must then undergo chemotherapy to wipe out their existing stem cells, before receiving an infusion of their own edited cells.
"These are curative, game-changing products, but complex to give and launch," Evans said.
Beam and others are working on second-generation approaches that they hope will remove the chemo step and move the gene-editing process from outside the body — ex vivo — to inside the body, or in vivo.
Biotech Stocks Aim To Improve Gene Editing
Last year, Intellia Therapeutics won the FDA's go-ahead to begin testing two in vivo gene-editing drugs in people. The first drug treats a devastating swelling disease. The second targets the gene responsible for abnormal protein that can build up on the nerves, heart, kidneys and eyes.
Investors in biotech stocks are closely watching Intellia's progress. But a whole host of biotech companies are working on second- and third-generation in vivo treatments.
Take Verve Therapeutics. The company bypassed regulatory scrutiny to begin testing an in vivo gene-editing drug for people with heterozygous familial hypercholesterolemia, an inherited disease that causes dangerously high LDL cholesterol. This increases the risk of heart disease and heart attacks.
There have been puts and takes across the board for Verve. A single dose of Verve's drug lowered LDL cholesterol by up to 55%. But the biotech stock crashed almost 41% on Nov. 13 on safety concerns. One patient died of cardiac arrest five weeks after treatment. Another had a heart attack a day after getting the gene-editing drug. The latter could have been related to treatment.
Big Pharma Stocks Buy Into Genetics
Still, Big Pharma is embracing the medical technology. Eli Lilly agreed in October to buy the rights to three of Verve's gene-editing drugs for $250 million upfront. Two of the drugs aim to permanently lower proteins tied to high LDL cholesterol and triglycerides. The third is an undisclosed cardiovascular drug.
"We could not think of a better partner at this stage," Verve CEO Sekar Kathiresan told IBD.
Kathiresan says there's no question gene editing treatments will treat a broad population of patients. The Centers for Disease Control and Prevention estimates about 86 million adults in the U.S. have high LDL cholesterol. Statins are very effective. But many patients don't know they have high cholesterol. And those who do often aren't compliant with taking their medications.
"The biggest question we get asked is, 'If there are already lots of treatment options, why do we need this?' " he said. "Theoretically, you can lower LDL in patients maybe 40% to 60%. But in the real world, the (effectiveness) is 0%. Patients aren't on these medications."
But Arrowhead's Anzalone questions the benefits of a one-time treatment whose safety still isn't borne out over decades vs. transient treatment options. He says the company's RNA interference approach to high cholesterol and triglycerides — a once quarterly or biannual injection — is the safer bet. Arrowhead is testing approaches for high cholesterol and dyslipidemia.
"I think RNAi can run that really nice 'Goldilocks' approach," he said. "You can treat once a quarter or twice a year. Compliance is simple and straightforward."
Can Biotech Stocks Make A Dent In Neurology?
The neuroscience space is also promising, as shown by a slew of new approvals. The FDA signed off on Leqembi, an Alzheimer's treatment from Biogen and Eisai, as well as a new amyotrophic lateral sclerosis drug from Biogen and Ionis Pharmaceuticals. The FDA is now reviewing Karuna Therapeutics' schizophrenia drug.
"I think neuroscience is going to be the next oncology," Arnon Rosenthal, CEO of Alector Therapeutics, told IBD. Alector is working on treatments for Alzheimer's disease in partnerships with GSK and AbbVie.
While Leqembi and donanemab work by removing built-up plaque in the brain, Alector is approaching Alzheimer's disease as a deficit of the immune system. And, similar to immuno-oncology drugs like Merck's blockbuster Keytruda, Alector hopes to recruit the immune system to do its work.
"We want to rejuvenate the immune system to go after Alzheimer's disease," he said.
Like other biotech stocks, Alector shares are on an upswing. After bottoming out at 3.66 on Nov. 16, Alector stock has surged 118% through the end of the year. It's important to note that Alector remains a low-priced stock. So, its big moves should be taken with a grain of salt.
But the stock surge underscores a looming renaissance in neurodegenerative drugs.
Rasbach, the Eventide fund manager, is optimistic about the Alzheimer's treatment space.
"Those are not rocket ship launches," he said of Leqembi and donanemab. "But I think the market has come to the realization that these will be slow and steady."
The Next Frontier In Alzheimer's Disease Drugs
Next-generation approaches to Alzheimer's treatment will likely seek to improve upon Leqembi and donanemab by offering drugs that are more effective, easier to administer or safer. These drugs are tied to swelling in the brain known as amyloid-related imaging abnormalities, or ARIA.
Biogen and Eisai are already working on a subcutaneous formulation of Leqembi. In October, Eisai said 76% of patients who received the under-the-skin injection showed no cognitive decline over 18 months, and 60% showed improvement at 18 months. Researchers tested the shot in patients with low levels of tau, a protein tied to Alzheimer's disease. The study was also in early-stage patients.
It will be important to watch other approaches to Alzheimer's disease, says Tema's Song.
"It's game-changing that we got approval," he said, referring to Leqembi. "But it's going to take alternative mechanisms of action in combination with these therapies and it will take a while for the infrastructure to take on patients."
Similarly, Alector's Rosenthal notes there seems to be a ceiling for amyloid-targeting drugs. As a class, they've shown a roughly 25% to 30% slowdown in cognitive decline among all Alzheimer's patients. The Lilly drug has shown more promise in patients with high levels of tau. Still, the Leqembi approval and donanemab test results have helped stoke interest in the space.
"Alzheimer's disease was teetering on the edge to become a stroke-like disease where people think it's not curable or able to be invested in," Rosenthal said. "People are now looking for therapeutics and cures."
Biotech Stocks And The Rise Of AI
The biotech industry will also likely to be impacted by a major trend: artificial intelligence.
Academic researchers and biotech companies are sifting through huge databases of genetics to make connections between biology and disease. AI will undoubtedly play an important role in helping unravel some of these puzzles.
"What's different now is people are making intended data sets for AI," Pande, of Andreessen Horowitz, said. "They're not doing AI as an afterthought. It's only possible because of the advances on the biology side. You can bring the algorithms over, but without the data it won't work. This would have been a dream 10 to 15 years ago."
AI can be incredibly powerful in drug development, in helping identify new protein and genetic targets, designing winning designs for clinical studies, and finding the right patients for the right drugs.
But Bohen, of Olema, says designing drugs will still require human assistance for some time.
"The way it's being used is to try to take large data sets and try to de-convolute them," he said. "The associations require other AI. Don't forget about 'actual intelligence.' It still has to go through a filter of people who know things about these diseases. I think the role of biotech won't change. Hopefully, the efficiency with which we can apply our role will change."
How Biotech Buyouts Fit In
Meanwhile, Big Pharma is grappling with major challenges as it enters 2024.
A patent cliff threatens to wipe out more than $200 billion in sales before the end of the decade, according to several estimates.
Further, the Centers for Medicare and Medicaid Services will soon start negotiating the prices of some of the costliest drugs. That will put the onus on pharmaceutical companies to find ways to replace the lost revenue. Arda Ural, the EY industry markets leader for health sciences and wellness, expects oncology, immunology/inflammation and rare disease companies to be particularly tantalizing targets.
Ural noted that 27% of biotech companies don't have enough cash to get through one year.
"That's a big, damning statistic," he told IBD. "How do you overcome that kind of desert? You need to do something."
But the companies that recently accepted buyouts were already on the "shortlist" of candidates, says SR One's George. They include companies like Prometheus, Karuna and ImmunoGen, which have demonstrated promise in treating under-treated diseases or have gained high-profile approvals.
Premiums have been rich. Bristol Myers paid a 55% premium for biotech stock Karuna.
"Pharma is willing to overpay to get the highest quality asset," George said. "I expect a continued cadence of 10 to 20 large deals a year."
Are Biotech Stocks In Recovery?
Though biotech stocks as a group remain far below the 2021 high, shares are pulling ahead bullishly.
Top performers in the group include names like Amphastar Pharmaceuticals and Neurocrine Biosciences. Amphastar, which makes injectable medicines, has a perfect IBD Digital Composite Rating of 99, while Neurocrine has a Composite Rating of 97. This means it ranks in the top 3% of all stocks when it comes to fundamental and technical measures.
As of Friday's close, the biggest biotech stock, Amgen, was trading just beyond the 5% buy zone above a buy point at 288.46 out of a cup base, according to MarketSmith.com. The buy zone goes to 302.88. Amgen extended its gains midday Monday.
Vertex, another big-name biotech company, is trading narrowly above a buy zone after breaking out of a flat base in mid-December. Similarly, Regeneron Pharmaceuticals stock topped a buy point in December. On Monday, shares dropped back into the chase zone after Regeneron said U.S. sales of its biggest drug, eye disease treatment Eylea, came in light during the fourth quarter.
The group itself has a Relative Strength Rating of 96, which means the collective performance of all 756 stocks is in the top 4% of all stocks. That's up from an RS Rating of 63 just four weeks ago. Notably, the group ranks No. 12 out of 197 groups IBD tracks according to six-month performance, improving from No. 73 a month ago.
The SPDR S&P Biotech ETF is currently on the IBD Leaderboard watchlist. The fund has been forming a double-bottom base and is trading just under the 90.91 buy point.
Song, of Tema ETFs, says the signs are pointing to a promising 2024 for biotech stocks.
"We've never had three years in a row of down years for biotech," he said. "I think in 2024 we need to be a little more optimistic. We have to look at it as a glass half full."
This story has been corrected to reflect which tissue type Arrowhead Pharmaceuticals plans to tackle in a potential obesity treatment.
Follow Allison Gatlin on X, the platform formerly known as Twitter, at @IBD_AGatlin.
