On Tuesday, RBC Capital Markets released findings from their 2024 Biotech Halftime Report, revealing a more cautious outlook among investors towards the biotech sector.
According to the report, the SPDR S&P Biotech ETF (NYSEARCA:NYSE:XBI) has seen a significant rebound, with a 12% year-to-date increase and a 57% rise since the lows of October 2023. Despite these gains and some recent positive developments in the industry, investor sentiment has shifted since the previous survey conducted in late 2023.
The survey indicates that only 37% of investors believe the XBI will outperform the S&P 500, a decrease from 55% in the previous survey. Similarly, the percentage of investors planning to increase their exposure to the biotech sector has dropped to 37% from 43%. While a majority still consider the sector undervalued, at 54%, this figure has slightly declined.
The report also highlights a difference in opinion between specialist and generalist investors, with specialists showing more bearishness. Hedge funds (HFs) are also more pessimistic compared to long-only investors (LOs).
The top tailwind for the sector is seen as mergers and acquisitions (M&A), with companies like Insmed (NASDAQ:INSM) Incorporated (NASDAQ:INSM), Viking Therapeutics (NASDAQ:VKTX), and Cytokinetics (NASDAQ:CYTK) identified as top M&A candidates with market caps over $5 billion. For companies under $5 billion, Merus (NASDAQ:MRUS), Immunovant (NASDAQ:IMVT), and Molecular Templates (NASDAQ:MTEM) (NASDAQ:MLTX) are seen as likely targets.
Innovation is consistently seen as a positive driver for the sector, and inflation, which was previously viewed as a negative factor, is now considered a tailwind. However, potential headwinds include generalist investors remaining cautious, concerns over drug pricing, and uncertainty surrounding upcoming elections.
Historically, the RBC survey has had a mixed track record in predicting the XBI's performance relative to the S&P 500, with a success rate of 53% over approximately six years. Additionally, about 33% of previously identified top M&A targets have been acquired.
Looking ahead, RBC suggests that while attractive opportunities remain, broad outperformance is less likely, and investors should focus on companies with near-term clinical, regulatory, or product launch catalysts.
Among the favored companies for the second half of 2024 are large-cap firms Regeneron (NASDAQ:REGN) Pharmaceuticals (NASDAQ:REGN), Amgen (NASDAQ:AMGN), and Biogen (NASDAQ:BIIB), as well as a selection of mid-cap and small-to-mid-cap companies including Intra-Cellular Therapies (NASDAQ:ITCI), Legend Biotech (NASDAQ:LEGN), Ionis Pharmaceuticals (NASDAQ:IONS), and Ultragenyx Pharmaceutical (NASDAQ:RARE).
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