Eight months ago, with the XBI at $85.50, I wrote an article suggesting that biopharmaceutical stocks should begin to rally. The subsequent action has been standard, with upthrusts followed by corrections. My thinking has been that a sufficient number of the overpriced IPOs from the class of 2021-2022 had declined tremendously, and that valuations had left many stocks at prices that would result in mergers. Larger pharmaceutical companies have a continued need to augment their pipeline, especially with the upcoming patent expiration cycle and the beginning of Medicare “negotiated” pricing.
Fundamentally, I maintain that the prospects for the drug industry are favorable, driven by an aging population (greater disease burden) and the prevalence of chronic diseases coupled with my view of an ongoing research renaissance. There are tremendous advances being made in oncology and hematology, with more cancers becoming chronic diseases or cured. In cardiometabolic disease, the incretins are revolutionizing treatment for obesity and the associated cardiovascular, renal, hepatic, endocrine, orthopedic and laryngological diseases. Genetics medicines (RNA, oligonucleotides, siRNA, gene editing, gene therapy) are making inroads in sickle cell disease, spinal muscular atrophy, ophthalmology, amyloidosis, hyperoxaluria and hypercholesterolemia. Additionally, there are late stage clinical studies that are promising for Lp(a) reduction, wet AMD and oncology.
As I have previously stated, the significant decline in the XBI (XBI) ETF from 2021-2023 was warranted, as many companies went public with excessive valuations and pre-clinical drug candidates. The FDA approval process would require these companies to continually raise money, thereby causing dilution. Furthermore, the early stage of discovery suggested that the failure rate would be high. The bottoming of the XBI in late 2023 coincided with a dearth of IPOs and secondary offerings and several takeovers at impressive premiums.
From a technical standpoint, the XBI chart shown below suggests that the recent isolated “M top” and subsequent correction may be negated. With a strong move through 101.50, the index could rally longer term to 140. I note that my target has been 115.
XBI 2 Year Chart
XBI 3 Year Chart
Investors have been underweight biopharmaceutical stocks for the past year, given the 2021-2023 bear market and the concerns regarding legislation. I believe that this has provided for an opportunity to accumulate both high quality, larger companies and promising, smaller companies. The stock selection process is critical, as a great number of 90% plus decliners will prove not to be viable. Otherwise, an ETF, such as XBI, could be considered.
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