Beyond the Bear: The Case For A Bright Horizon for Biotech in 2024

The biotech sector is now deep into its third year of one of the most severe bear markets in its history. This downturn is the most significant we've seen in over twenty years of investing in the sector, surpassing both the 2008-2009 Global Financial Crisis and the 2015-2016 sector downturn in both duration and the magnitude of declines.

It is important to note that, despite all the gloom and doom, there have been no substantial changes to the fundamentals surrounding the biotech industry. In many ways, the outlook is better than ever. Notably, the implementation of AI/ML at multiple points along the healthcare value chain, from drug discovery, through GMP manufacturing, and to the patient's bedside, will drive down the cost of innovation and provide us with the next generation of healthcare tools to eradicate many, if not all, diseases (we will likely see the first CRISPR therapy approved next year, which will be the harbinger of a new era of precision, personalized medicine). Advances in ML promise to accelerate drug discovery and development through computer-modeled simulations that predict molecular behavior, leading to effective drug design and delivery.

There are other key fundamental factors that stand to benefit the biotech sector as we enter 2024:

• Large biopharma companies are sitting on all-time high amounts of cash on their balance sheets. With equity valuations at relatively low levels, the cash heavy balance sheets of large biopharma companies offer a compelling backdrop for a significant uptick in M&A activity across the biotech sector.
• Improving regulatory environment in 2024, with several key FDA decisions expected in the next year. The FDA continues to show increasing permissiveness of late for limited and mixed clinical data in high unmet need and orphan indications.
• The US Presidential election year campaigning is not likely to focus heavily on pharma regulation, and will be dominated by inflation concerns, recession fears, illegal immigration, and foreign policy (Ukraine, Middle East, etc.). However, ongoing Medicare prescription drug price negotiations threaten Big Pharma's blockbuster revenues, and other provisions of the Inflaction Reduction Act may incentivize the bigger players to acquire new clinical-stage assets that will reinstate some of their pricing power.

The biotech sector tends to exhibit cyclical patterns and one can expect that after a 3-year bear market the tides will turn and the long term secular bull market will reassert itself.

At MedicalGold, we believe that a major bear market bottom will be put in place before year end. In fact, there is a chance that the bottom has already been put in place.

Since 2006, November has been the best month of the year for the biotech sector with an average monthly gain of 4.0%.

The XBI is deeply oversold and has begun to display bullish momentum divergences:

XBI (Daily)

Looking at the entirety of the current setup including:

1. A 20% YTD decline
2. The 3rd year of a bear market for the biotech sector
3. And a transition to the most bullish time of the year for the biotech sector historically

Simply put, I like the risk/reward proposition. The 2022 low near $62 offers a clear downside reference point that traders can use, roughly 8% below today’s closing price of $67.09.