This Rebounding Sector Could Be Interesting Q1 Idea

For the first time in what feels like an eternity by this industry’s standards, biotechnology assets are showing signs of life.

Consider the case of the SPDR S&P Biotech ETF (XBI) – one of the oldest and largest biotech exchange traded funds. Following annual losses in excess of 20% in both 2021 and 2022, XBI snapped out of that funk in less-than-awe-inspiring fashion last year, gaining 7.6%. However, the ETF is higher by 17.45% for the month ending Jan. 8, confirming it has some momentum.

That’s important because the annual J.P. Morgan Healthcare Conference kicked off in San Francisco on Monday. One of the most widely observed industry conferences of any stripe, that convention has a lengthy history of generating material news flow for biotech investors. As of this writing, three days remain in the conference, so it’s possible past precedent will repeat this year.

Obviously, there are limitations on how much a single, four-day event can affect an industry as sprawling as biotech and 2024 is in its infancy, but there are plenty of potential tailwinds for biotech equities that could emerge as this year unfolds.

Buoyant Biotech Outlook

One reason to be excited about biotech this year is momentum on the CRISPR gene editing technology front – one of the most disruptive, potential-rich corners of the broader healthcare sector.

“Therapeutic treatment is one of many applications of the CRISPR technology in the drug development value chain. It also can be used to diagnose infectious disease, facilitate drug discovery, and improve existing therapies,” notes State Street’s Anqi Dong. “Neuroscientists have used CRISPR to discover why certain genes may protect brain cells from degeneration. Cancer drugmakers have used it to improve the efficacy of traditional chemotherapies and more advanced CAR-T cell therapies.”

Recent regulatory success regarding CRISPR is one reason why the space has become a hotbed of investment activity, which could include more mergers and acquisitions this year.

“Large drugmakers and venture capital investors have seen its potential and invested millions to secure intellectual property. In 2021, venture capitalists invested $1.08 billion in 31 CRISPR startups, compared with $173 million in 2020,” adds Dong. “Most recently, Eli Lilly agreed to spend up to $600 million to acquire the rights to co-develop base editing programs for cardiovascular diseases from Beam Therapeutics.”

More Reasons to Consider Biotech Bets

There are other, broader tailwinds for biotech assets. Notably, the often capital-intensive industry was hampered over the past two years by the Federal Reserve’s 11 interest rate hikes.

A possible takeaway from that is that biotech stocks don’t necessarily rate cuts to arrive this year, but as long Treasury yields don’t spike as they did last year, that could be interpreted as “rate relief” for some rate-sensitive asset classes, including biotech.

“Near-term rate expectations may continue driving the biotech industry performance given its -0.7 correlation with 10-year yields,” concludes Dong. “But secular innovation trends may transcend monetary cycles, offering investors greater capital appreciation potential than the broad market over long-term investment horizons.”

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