It’s been a slog for biotech stocks in 2024.
But that shouldn’t necessarily be the case, as artificial intelligence (AI) has created limitless potential in the market.
More specifically, it has created more time.
The medical industry is on the cusp of revolutionary breakthroughs in therapies and general patient care… beyond what you hear on the news about popular weight loss drugs.
AI and machine learning can help doctors analyze medical imaging data (think X-rays and MRIs) to diagnose patients quickly and accurately.
However, AI’s most significant revolution has come in the biotechnology industry.
On average, it takes at least a decade and billions of dollars to develop a new drug. But now, AI can predict how drugs interact with the body and reduce painstaking lab work…
That’s cutting down on both costs and development time.
Not only does this help patients battling life-threatening illnesses, but it also bodes well for biotech stocks.
Because bringing life-saving drugs to market quicker means achieving profitability even faster.
Biotech Stocks Poised for a Breakout
The Russell 2000 Dynamic Biotechnology Subsector Index lost 33% from June 2023 to October 2023.
High interest rates prevented capital-starved biotech companies from getting the money they needed to further research and development.
But there was some optimism once the Federal Reserve signaled it was done raising rates, opening the door for cheaper funding in the near future. That news sent the sector up 60% off its 2023 lows into March 2024.
But the rally didn’t last…
After a short dip in April, the SPDR S&P Biotech ETF (NYSE: XBI) rose and traded flat through the summer and into the fall.
Now, however, the biotech sector is flirting with a breakout above its summer range:
Biotech Sector Trying to Breakout
As I mentioned in a March 2024 article, investors were starting to reclaim interest in biotech stocks.
Now that the Fed has executed a pair of rate cuts since September, borrowing costs for smaller biotech stocks has made R&D money easier to come by. But there is something else at play here…
Let me explain.
These Are Still the Most Important Letters in Biotech
Something else I mentioned in that March article was the importance of two letters in the biotech industry … M&A.
Larger pharmaceutical companies have relied on mergers and acquisitions to expand their pipeline of potential drugs.
In the past, Big Pharma companies honed in on small, promising biotech firms with the hopes of huge profits in the future.
In 2023, there were 32 mergers and acquisitions in the biotech space … which isn’t a huge number… but something is trending in 2024.
So far, there have been 23 M&A deals in the sector, with big companies like Eli Lilly & Co., Merck & Co. Inc. and AbbVie Inc. making significant splashes.
AI continues to make a big difference in biotech as these larger pharmaceutical producers are eyeing advanced technology, analytics and platforms to make drug delivery more efficient.
That’s one of the reasons why biotech M&A activity eclipsed $100 billion in 2023 … the first time that figure was hit since 2019.
Of course, there are always other headwinds these larger companies have to work against.
One of the biggest is that these larger pharmaceutical companies will soon start losing patent protection for some of their most profitable drugs.
That means smaller companies can swoop in with cheaper alternatives and make a fortune … not just for themselves, but for investors.
This scenario presents a win-win for the industry.
Either small companies will boost their profitability using AI and working to fill the demand gap after patent protections lapse or larger pharmaceutical companies come in and buy these smaller companies to keep these profits in their own pocket.
No matter what, I still firmly believe… as I did in March … that the biotech sector is one to keep your eye on for investment potential.
Interest rates are coming down, and M&A activity is trending higher.
This means larger profit potential for smart investors like you, who spot this trend and move to capitalize.
Safe trading,
Matt Clark, CMSA®
Chief Research Analyst, Money & Markets
