Investors looking for coverage this year would do well to seek a safe haven in large-cap pharmaceutical stocks, a trend that is likely to continue into 2023. The NYSE Arca Pharmaceutical Index has gained 3.8% year-to-date to date as of Tuesday’s close. compared to a 19.8% decline in the S&P 500 Index over the same period. However, the rising interest rate environment and the desire to avoid risky bets has made it a difficult year for small- and mid-cap biotech stocks. But the outlook for the group could improve next year as new drug launches, product approvals and a return to merger and acquisition activity boost the stock’s value, some investors believe. Although the Nasdaq Biotech Index is down 10.9% year-to-date, it is up 7.6% over the past three months as of Tuesday’s close. That gain topped the three-month performance of the Russell 2000 (down 3.7%), the S&P 500 (down 2.1%) and the Nasdaq (up 1.5%). Large-cap pharmaceutical stocks have benefited from widespread concerns about an economic downturn. It is thought that even in a recession, consumers will still need to seek health services. That sentiment will continue to push the group through at least the first half of 2023. There are also other catalysts for pharmaceutical stocks, such as expected drug launches and new products from this year’s M&A, as well as easing foreign exchange pressures. Investors are highly focused on advances in the treatment of Alzheimer’s disease, new weight loss medications and developments in gene editing. The Inflation Reduction Act provided some clarity around drug pricing that should help health care stocks. With a divided Congress, there is less risk that new legislation will change the current rules. Passed in August, the IRA caps price increases for drugs under Medicare at the rate of inflation and offers discounts to patients after they reach catastrophic levels of coverage. But the focus will be on how companies position themselves strategically as the law also imposes discounts on drugs after the therapies have been on the market for 9 years for small molecule drugs or 13 years for biologics. A top performer with room to run On Tuesday, Barclays named Merck one of its top picks in the sector. Shares are up 43% year-to-date, but Barclays’ $128 price target implies nearly 17% upside from Tuesday’s closing price. Analysts on average have a $113.86 price target on the stock, according to FactSet. “Looking ahead to 2023, we see a dynamic year in which we expect the company to be able to post some wins across Keytruda [late-cycle managment] effort, significant progress in the advancement of [cardiovascular] exclusivity, and continued operational excellence with intact and moderate Keytruda/Gardasil drivers [foreign exchange] headwinds (after $2 billion in ’22),” Barclays analyst Carter Gould wrote in a research note. Gould also said 2023 will be a “make or break” year for Cytokinetics, which is expected to provide additional data in the second half of 2023. for aficamten, a treatment for thickened heart muscle known as hypertrophic cardiomyopathy. The analyst said the stock’s $4 billion market cap could double if the data is positive. Shares of Cytokinetics are down 2.5% year-to-date. The average price target, according to FactSet, is $62, or nearly 40% above the stock’s closing price on Tuesday. Increased M&A activity has long been a key catalyst in the sector. Rising interest rates and an uncertain economic outlook have muted deal activity in general. However, large pharmaceutical companies have had no choice but to seek to supplement their growth through acquisitions. Many are facing expiring patents and need to replace those sales to continue growing. The result was a modest pickup in value deals this year. The largest was Amgen’s $27.8 billion bid for Horizon Therapeutics, maker of Tepezza, a treatment for thyroid eye disease. He continued Amgen’s acquisition spree and emphasizes its focus on rare diseases. In August, Amgen agreed to buy ChemoCentryx, which makes treatments for rare autoimmune diseases. Pfizer, fresh off the success of its Covid vaccine and treatment, has struck two deals this year. There was the $11.6 billion acquisition of Biohaven Pharmaceuticals and the $5.4 billion acquisition of Global Blood Therapeutics. Biohaven allowed Pfizer to add migraine drug Nurtec ODT to its portfolio, while Global Blood added an oral treatment for sickle cell disease. None of this was the mega-meltdown of consents seen in 2019, but analysts have taken the Amgen deal, announced just days ago, as a sign that the pace could pick up in 2023, especially given that many stocks biotech stocks are trading in an extremely depressed state. values. IPOs slow to a trickle It won’t take long to see an uptick in new biotech offerings. According to William Blair, there were 16 new issues through December 14, which raised a total of $1.6 billion. That’s down significantly from 2021, when a record 92 companies debuted, raising $17.3 billion. Secondary offerings were also slow, but some companies that had offered strong clinical data were able to raise funds, William Blair analysts said. They counted 96 deals this year that raised a total of $17.3 billion. By comparison, $24.8 billion was raised last year in 187 separate deals, according to William Blair. Among this year’s deals were Alnylam Pharmaceuticals, Karuna Therapeutics, Nkarta and Vaxcyte. Alnylam has an average overweight rating, while the other three stocks are rated an average buy, according to FactSet. Given that backdrop, William Blair analyst Matt Phipps said he expects later-stage biotechs to continue to outperform early-stage companies, which are inherently riskier bets. “A lot of it is driven by the M&A we’ve seen recently,” Phipps said, explaining that acquisition targets have been companies that have had commercial success or positive phase 3 trial data. Gene therapies in focus Investors will be watching closely monitor the progress of some gene therapies, according to Phipps. He highlighted UniQure, a pioneer in AAV gene therapy covered by analyst Sami Corwin at William Blair and BioMarin, which is working toward approval for Roctavian, a treatment for severe hemophilia A. UniQure received approval in November for Hemgenix, a treatment in class for adult patients with hemophilia B. Gene therapies are expensive but can be life-changing for patients. Priced at $3.5 million, Hemgenix is currently the most expensive drug in the world. “Yes, these are expensive therapies,” Phipps said. “It’s quite a pain … to get a patient to work through all the paperwork with the insurance, making sure all the care is in place to go through the whole process. … Making sure they [therapies] can have good traction will really read across the gene therapy industry.” The argument for these treatments is that they are single-use therapies and will save money over time. In Hemgenix’s case, successfully treated patients would be able to skip prophylactic infusions and would have no more costly bleeding episodes, potentially saving millions over a patient’s lifetime.UniQure shares closed at $23.03 on Tuesday and have risen up 11% year-to-date. According to FactSet, the stock has an average Buy rating and a price target of $51.59, meaning it could double in value over the next year. Phipps’ top pick in the universe his coverage is outperforming Chinook Therapeutics. The stock has a $1 billion market cap and is up 54% over the past year. According to FactSet, its average price target is 35d olars, or more than 39% higher than its current price. Chinook, which focuses on rare kidney diseases, is well-funded, with current money likely to give it a runway in 2025, according to Phipps. He expects a steady stream of clinical updates to help boost the stock’s value. “They’re just well positioned in this space with two drugs, one that’s already in phase 3, with phase 3 results expected in the third quarter,” Phipps said. If approved, that drug, atrasentan, will be the second ETA inhibitor on the market for the treatment of chronic kidney disease IgA nephropathy, but Phipps expects the drug to still have a significant market opportunity. The second drug, BION-1301, is generating more excitement, according to Phipps, as it appears it may actually be disease-modifying by reducing the build-up of a protein in the kidneys.
