As debate continues over when the Federal Reserve might begin cutting interest rates, biotech industry analysts argue that the case for stocks in the sector is growing. The central bank has kept rates steady since last July as it patiently waits for more signs that inflation is cooling. But a reading on consumer prices for March released Wednesday dampened hopes that policy is about to ease. Market expectations are now pegged at September rather than June or July, according to CME Group's FedWatch tool, an indicator of 30-day federal funds futures prices. Last week, Morgan Stanley analysts noted that it's the months before an initial rate cut that biotech stocks outperform. By contrast, the group actually tends to underperform in the initial period after rates are lowered, the Wall Street bank said. In fact, the Nasdaq Biotech Index is up about 14% from its October low. Morgan Stanley also believes that the case for biotech stocks is further strengthened by the financial environment and the prospects for mergers and acquisitions, as well as upcoming innovations. .NBI 6M Mountain Nasdaq Biotechnology Index over the past six months “Assuming rates trend downward, new innovations work, and mergers and acquisitions continue, we see the potential for another cycle of sustained outperformance for the industry.” “the analysts wrote. The case for mergers and acquisitions The rapid pace of mergers and acquisitions at the end of 2023 has continued in the first quarter. Needham tracked 13 biotech deals over the past three-month period. Analyst Joseph Stringer said the deal pace was well above the quarterly average of 8.2 deals dating back to 2018. Stringer said buyers have been favoring companies with later-stage therapies in development, but deals More recent ones have included biotechnologies with treatments in earlier stages. That new trend suggests there may be a greater appetite for risk. “We believe M&A activity will remain above average through the remainder of 2024 and will lean more toward target mid-stage companies, with deals between $1 billion and $3 billion and a particular focus on oncology, immunology and rare diseases,” Stringer said. saying. He listed Phathom Pharmaceutical, Vaxcyte and Rhythm Pharmaceuticals as some of the companies he covers that are most likely to be acquired. PHAT 1Y Mountain Shares of Phathom Pharmaceuticals over the past year. Through Tuesday's close, Phathom shares are up more than 31% since the beginning of the year, but analysts surveyed by LSEG predict the stock could rise nearly 89%, based on Wall Street's average price target. The New Jersey-based company focused on gastrointestinal treatments recently received approval of Voquenza from the Food and Drug Administration for erosive esophagitis and associated heartburn. This is Phathom's first product and it has begun marketing it directly to consumers through commercials and other types of advertising. Needham said Phathom could expand the drug's label to non-erosive forms of gastroesophageal reflux disease (GERD). Shares of Vaxcyte, which has been working on a pneumococcal vaccine, have gained 2% since January, as of Tuesday's close. According to LSEG, analysts predict an average rise of 60% for the stock. RYTM 1Y mountain Rhythm stock over the past year. But Rhythm stock is down more than 6% so far this year. LSEG said the nine analysts covering the stock rate it a Strong Buy or Buy, with an average price target equating to about 35% upside. The company has been working on Imcivree, a treatment for hypothalamic obesity caused by damage to the hypothalamus. There are currently no treatments for the disease. Morgan Stanley expects oncology and immunology to be focus areas for companies making acquisitions, while anticipating central nervous system and neuroscience to attract more attention in the coming months. “In the near term, within our US biopharmaceutical coverage, we see [Merck ] continues to have the combination of need to compensate for the Keytruda [loss of exclusivity] and significant balance sheet capacity…, and we see that companies across the sector remain focused on additional investments (< $5 billion)," Morgan Stanley wrote. Analysts said that although AbbVie, Bristol Myers Squibb and Pfizer have closed deals recently, All three remain among the most likely buyers in the medium term The case for innovation Morgan Stanley also favors owning biotech stocks that have a strong pharmaceutical platform, even if the key catalyst data. clinical trials and FDA approvals are further away is among the stocks rated overweight that Morgan Stanley prefers in this category. Other stocks it likes include Intellia Therapeutics, a leading genome editing company, and Rocket. Pharmaceuticals, focused on gene therapies for rare disorders. “Historical performance data… indicates that. Companies with cash flows weighted in outside years (i.e. those furthest from launches and revenues) generally do better in low or declining rate environments..., which we think makes sense since those cash flows cash are more sensitive to changes in discount rates," the investment bank's analysts wrote. —CNBC's Michael Bloom contributed to this report.
