Investors looking for cover this year would have done well if they sought 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 as of Tuesday’s close, compared with a 19.8% drop in the S & P 500 Index over the same period. However, the rising interest rate environment and a desire to avoid risky bets has made for a tough 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 of merger and acquisition activity drive up the value of the stocks, some investors believe. Although the Nasdaq Biotech Index is down 10.9% year to date, it has climbed 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%), 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. The thought is that even in a recession, consumers will still need to seek out health services. That sentiment will continue to propel the group at least until the first half of 2023. There also are other catalysts for pharma stocks such as expected drug launches and new products from this year’s M & A as well as easing pressures from foreign exchange. Investors are very focused on advancements in Alzheimer’s disease treatment, 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 of new legislation upending current rules. Passed in August, the IRA caps price increases for drugs under Medicare to the rate of inflation and provides rebates to patients once they hit catastrophic coverage levels. But the focus will be on how companies position themselves strategically as the law also imposes discounts on drugs after the therapies have been in 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% further upside from Tuesday’s closing price. On average, analysts have a $113.86 price target for the stock, according to FactSet. “Looking to 2023, we see a dynamic year in which we expect the company will be able to post some wins across the Keytruda [late-cycle managment] effort, meaningful progress in advancing the [cardiovascular] franchise, and continued operational excellence with Keytruda/Gardasil drivers intact and moderated [foreign exchange] headwinds (after $2bn in ’22),” wrote Barclays analyst Carter Gould 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 muscles known as hypertrophic cardiomyopathy. The analyst said the stock’s $4 billion market cap could double if the data is positive. Cytokinetics shares 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. M & A activity picking up M & A has long been a major catalyst in the sector. Rising interest rates and an uncertain economic outlook has muted deals activity broadly speaking. However, large pharma companies have had little choice but to look to supplement their growth with acquisitions. Many are facing patents that are expiring and they need to replace those sales to keep growing. The result was a modest pickup in deal value this year. The biggest was Amgen’s $27.8 billion offer for Horizon Therapeutics , the maker of Tepezza, a thyroid eye disease treatment. It continued Amgen’s buying spree , and sharpens 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 buyout of Biohaven Pharmaceuticals and the $5.4 billion purchase o f 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 these were megamergers of the likes that were seen in 2019, but analysts have taken the Amgen deal, announced only days ago, as a sign that the pace could pick up in 2023, especially given that many biotech stocks are trading at extremely depressed values. IPOs slowed to a trickle It won’t take much to see a pick-up in new biotech offerings. According to William Blair, there were 16 new issuances through Dec. 14, which raised a combined $1.6 billion. That’s far below 2021, when a record-breaking 92 companies debuted, raising a whopping $17.3 billion. Secondary offerings also were slow but several companies that had provided strong clinical data were able to raise funds, William Blair analysts said. They counted 96 deals this year that raised a combined $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 rating of overweight, while the three other stocks are rated a buy on average, according to FactSet. Given this backdrop, William Blair analyst Matt Phipps said he expects later-stage biotechs will continue to perform better than earlier-stage companies, which inherently are riskier bets. “A lot of that is driven by the M & A we’ve seen recently,” Phipps said, explaining that the acquisition targets have been companies that have had commercial success or positive phase 3 trial data. Gene therapies in focus Investors will be closely watching the progress of several gene therapies, according to Phipps. He highlighted UniQure , a pioneer in AAV gene therapy that is covered by analyst Sami Corwin at William Blair, and BioMarin , which is working on approval for Roctavian, a treatment for severe hemophilia A. UniQure received approval in November for Hemgenix, a first-in-class treatment for adult hemophilia B patients. Gene therapies carry big price tags, but can be life-changing for patients. With a list price of $3.5 million, Hemgenix is currently the world’s most expensive medicine. “Yes, these are expensive therapies,” Phipps said. “It’s pretty laborious … getting a patient working through all the paperwork with insurance, making sure all the care is set up to do the whole process. … Making sure those [therapies] can have good traction is going to really read through to the whole gene therapy industry.” The argument for these treatments is that they are single-use therapies, and will save money over time. In the case of Hemgenix, successfully treated patients would be able to skip prophylactic infusions and would no longer have costly bleeding episodes, potentially saving millions over the course of a patient’s life. UniQure shares closed at $23.03 on Tuesday, and are up 11% year to date. According to FactSet, the stock has an average rating of buy and a $51.59 price target, which means it could more than double in value over the next year. Phipps’ top pick in his coverage universe is the outperform-rated 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 $35, or more than 39% higher than its current price. Chinook, which focuses on rare kidney diseases, is well-funded, with its current cash likely to provide it a runway into 2025, according to Phipps. He expects a steady flow of clinical updates to help propel the stock’s value. “They’re just really well positioned in this space with two drugs, one that’s in phase 3 already, with phase 3 results expected in Q3,” Phipps said. If approved that drug, atrasentan, will be the second ETA inhibitor on the market to treat the chronic kidney disease IgA nephropathy, but Phipps expects the drug will still have a significant market opportunity. The second drug, BION-1301, is driving more excitement, according to Phipps, as it looks like it can actually be disease modifying as it reduces the build-up of a protein in the kidney.
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