Biotech stocks shine in November as pharmaceutical giants accelerate their acquisition pace

November was a memorable month for biotech stocks in the United States. During this period, gene therapy developers performed well, while pharmaceutical giants sought merger and acquisition opportunities in the improving macro environment of the industry.

According to Zhitong App, the SPDR S&P Biotech ETF (XBI.US), representing more than 130 biotech companies, rose by about 14%, while the S&P 500 index only rose by about 9%. In other areas of the healthcare sector, the SPDR S&P Pharmaceuticals ETF, which measures pharmaceutical stocks, rose by about 3%, and the broader healthcare industry as a whole rose by about 5%, such as the Healthcare Select Sector SPDR ETF (XLV.US).

Figure 1

Although the biotech industry has experienced a decline of about 55% since February 2021, November was the best-performing month for the biotech industry since November 2020. Jared Holtz, a healthcare equity strategist at Mizuho, attributed the recent surge to the overall rebound of small-cap stocks and market participants increasingly believing that interest rates will not rise further.

It is understood that the previous high financing costs and unfavorable interest rate environment have had an impact on the biotech industry, as rising yields have damaged the present value of their future cash flows, thereby reducing valuations. Asad Haider, an analyst at Goldman Sachs, told investors in early October that the SPDR S&P Biotech ETF "has largely become a reverse indicator of interest rates."

Figure 2

However, there are still optimistic aspects in the biotech field in November. Gene therapy developers, including CRISPR Therapeutics (CRSP.US) and Beam Therapeutics (BEAM.US), were notable beneficiaries this month.

Specifically, in mid-November, Switzerland's CRISPR and its US partner Vertex Pharmaceuticals (VRTX.US) received UK approval for their CRISPR-based drug exa-cel for sickle cell disease and β-thalassemia, marking the regulatory approval of the world's first gene editing therapy.

In response, Goldman Sachs' Haider pointed out that the future of biotech is challenging, and he believes that "the path of interest rates in the next month may not be uniform" and that "the long-term trend may still be uneven and challenging." However, financial institution BTIG is more optimistic about the prospects of the biotechnology industry. Analyst Justin Zeelin wrote in a report on Friday, "We believe that as we approach the end of 2023, 2024 could be a better year for this industry, with the improvement of the macro background and the return of interest in high-growth industries such as biotechnology."

Zeelin added, "We believe that investors are currently overlooking the fact that the fundamentals of this industry remain strong, and the innovation engine of pharmaceuticals and biotechnology is still running strong."

In addition, there are more catalysts awaiting the gene editing field this year, including a group of independent advisors to the FDA who expressed positive views on the therapy's marketing application in October, and exa-cel is expected to receive US approval by December 8th.

Large pharmaceutical companies are also paying attention to this. This month, there has been a surge in M&A interest in the pharmaceutical industry, with AbbVie (ABBV.US) proposing a $10.1 billion acquisition of cancer drug manufacturer ImmunoGen (IMGN.US). As a developer of antibody-drug conjugates, ImmunoGen has been the best-performing biotech stock in November.

It is worth mentioning that AbbVie's all-cash deal has raised the bar for other pharmaceutical companies' offers in October, including Eli Lilly's (LLY.US) $1.4 billion acquisition of radiopharmaceutical developer Point Biopharma (PNT.US) and Bristol-Myers Squibb's (BMY.US) $4.8 billion acquisition of cancer drug manufacturer Mirati Therapeutics (MRTX.US).