Trends may turn in biotech stocks' favor in 2025 after several years of poor performance, but it's still wise to place your bets carefully on some of the most innovative names. “We remain optimistic about the outlook for biotech,” Stacy Sears, senior vice president and portfolio manager at Emerald Advisors, said in an interview with CNBC. “I think underperformance (makes them) attractive.” The SPDR S&P Biotech ETF (XBI) is up more than 2% year to date, but is down 9% just since the election as investors wonder what changes the Trump administration will bring. Sears said investors will gain clarity on the regulatory and policy environment in the coming months, but in the meantime the current uncertainty creates opportunity, especially among the small- and mid-cap stocks it monitors. Waiting for a M&A rebound In recent years, biotech stocks have faltered due to a dearth of M&A activity and high interest rates, which has increased the cost of capital for companies and remained volatile even after the Fed began cutting it earlier this year. year. Innovation is still booming, and the new year is likely to bring a new round of drug approvals and launches, which could push stocks higher, analysts say. If returns cooperate, “and then we finally start to get a more meaningful increase in M&A activity, coupled with continued progress from a clinical perspective, I think that will bring eyes back to the group,” Sears said. Over the past five years, many industry observers have pointed to the looming “patent cliff” as a driver of future dealmaking. Big Pharma will need to replace more than $300 billion in revenue between now and 2028 It is looking to innovative biotech to fill the gaps, according to Yuri Khodjamiryan, chief investment officer at Tema Funds. “The cliff has already improved this year, but it will get stronger through '25 and '26,” expects Terry Smith, director of life sciences research at Emerald Neuroscience, immunology, inflammation, oncology and metabolism will be the most attractive clinical areas targeted by big pharma, but he does not expect a wave of speculative stock buying to lift the sector broadly when M&A activity resumes. “That's why we think an active strategy is really important because you have to choose it,” Smith said. “You can't own the entire index.” Emerald declined to provide specific stock picks for next year. Goldman Sachs analysts see AbbVie, Biogen, Johnson & Johnson, Merck and Roche as the most likely acquirers. Merck is better positioned in terms of “capital, need and positioning” and a record of recent deal-making success, while Johnson & Johnson may be able to “pursue a large target” after a series of smaller deals, she said. Insmed: A pivotal year ahead Insmed is a Buy-rated stock on Goldman's condemnation list and the company's analysis suggests it could be an attractive takeover target. Shares are up about 125% in 2024, and all analysts covering rare disease research rate it a buy or overweight, according to FactSet. On average, analysts see an upside of more than 28% compared to Friday's close. Next year “is expected to be another year of value creation for INSM through commercial execution and clinical data catalysts,” Goldman Sachs analyst Andrea Newkirk wrote in a research note earlier this month. INSM year-to-date estimates that the company's peak global sales of $5.9 billion for brensocatib “likely significantly” underestimate the drug's true potential. She expects it to be approved to treat a chronic lung condition known as bronchiectasis in the middle of next year, but more upside may come from its expanded use for other diseases. Insmed also has other respiratory assets in its portfolio, which could boost peak annual sales to $8.2 billion, it said. Barclays analyst Leon Wang is also impressed with Insmed, but his focus is on clinical data expected in the second half of next year for treprostinil palmityl inhalation powder, or TPIP, in pulmonary arterial hypertension, or high blood pressure in the lungs. “We are positively biased on this reading and look for superior efficacy compared to standard of care Tyvaso,” Wang wrote in a note to clients in mid-December. “…Overall, 2H25 could transform INSM into a multi-commercial product company that launches pivotal studies in two large indications.” Legend Biotech: Poised for an oncology rebound, many Wall Street analysts are optimistic about the outlook for Legend Biotech. Shares of the specialty CAR-T company are down 46% year to date, but the average price target, as compiled by FactSet, expects the stock to rise 147% since Thursday's close. LEGN Shares YTD Mountain Legend Biotech Year-to-Date “LEGN shares have been penalized due to what we view as an unfair comparison of clinical data versus (Arcellx's) anito-cel, as well as ongoing concerns about China risks, especially in light of new “management will be on the board of administration in January 2025,” Barclays analyst Gina Wang wrote, referring to clinical data presented by rival Arcellx at the American Society of Hematology conference on December 9. “We believe With the facts speaking for themselves, we expect an uptick in Carvykti's (Legend's) launch in 2025 with potential growth of 100% YoY for both 2025 and 2026, driven by on-track execution of manufacturing capacity expansion, and label expansion to the previous line of multiple myeloma with “CARTITUDE-5 data are likely to be positive in 2025, as well as a continuation of the outstanding clinical profile with more mature data,” Wang said. To occupy a leading position in the industry.” Piper Sandler has named Legend as one of its biotech-focused stocks. The investment bank said demand is so great that there is room in the market for Legend, its partner Johnson & Johnson, and Arcellx, which is working with its partner Gilead Sciences, to succeed. 'Stick with what you can measure' Legend was also among the names biotech analysts at Morgan Stanley highlighted in their 2025 forecasts. “We expect stocks with a product with existing market standing as well as expanding… Best performing brand in 2025.” Legend fits this description, as do companies like Argenx, Beigene, and Sarepta Therapeutics. and Cadence for Pharmaceuticals, among others. According to Morgan Stanley, their main theme for 2025 is “Commit to what you can measure.” A legend falls into the easiest group of what to measure, since it contains an existing product that has a chance to increase sales. The company's next group includes stocks like Insmed and Jazz Pharmaceuticals that have either recent drug approval or an imminent product launch as a key driver. The final group they compiled was a list of companies that have “material catalysts” that could lead to commercialization beyond next year. This more speculative group includes Rocket Pharmaceuticals, a company developing a treatment for Danon's disease, a rare genetic disorder that usually leads to fatal heart problems. Shares of Rocket are down about 61% year to date, and consensus price targets indicate an upside of about 285% from Friday's close, according to FactSet. Morgan Stanley expects a catalyst for the stock in late 2025 when data from a phase 2 trial of Rocket's RP-A501 gene therapy is expected. These are just a sample of the innovations biotech analysts are monitoring, and why they hope performance in the sector will improve. “You can only have so many bad years, right?” Tema Khadjamirian said. “At some point, valuations start to look very attractive. If you look at the healthcare sector overall, it's trading at about a 23% discount to the S&P 500, which is one of the lowest discounts we've seen. Certainly in the last 20 years.” “
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Innovative biotech stocks have a good chance of taking off in 2025
