Trends may turn in favor of biotech stocks in 2025 after several years of poor performance, but it would still be wise to bet cautiously on some of the newer names. “We remain bullish on biotech,” Stacey Sears, senior vice president and portfolio manager at Emerald Advisors, said in an interview with CNBC. “I think underperformance [makes them] Attractive.” The SPDR S&P Biotech ETF (XBI) is up more than 2% year to date, but is down 9% since the election as investors question what changes the Trump administration will make. Investors on Regulatory and policy environment in the coming months, Sears said, but in the meantime the current uncertainty creates an opportunity, particularly among small- and mid-cap stocks that it expects to M&A. In recent years, Biotech stocks have been held back by a lack of merger and acquisition activity and high interest rates, which have pushed up companies’ cost of capital and continued volatility after the Federal Reserve began tapering earlier this year. Analysts say it’s been humming along and a new round of drug approvals and launches is likely, “and then we’ll finally see more meaningful improvement in M&A activity.” Let’s start getting, together As well as the continued progress from a clinical perspective, I think this will bring eyes back to the group,” said Sears. XBI 5Y Mountain SPDR S&P Biotech ETF Over the past five years many industry observers point to a widening “patent cliff” as a driver for future dealmaking. Big pharmaceutical companies will need to replace more than $300 billion in revenue between now and 2028, and will look to advanced biotechs to fill the gap, according to Yury Khodjamiryan, chief investment officer at Tema Funds. “The rock really picked up this year, but it’s going to be stronger than ’25 and ’26,” he said. Terry Smith, Emerald’s director of life sciences research, expects neurology, immunology and inflammation, oncology and metabolism to be the most attractive medical areas for big pharma, but he speculates on the field’s broader uptake. Don’t expect a stock-buying frenzy. M & A activity resumes. “That’s why we think a proactive strategy is really important because you have to pick them up,” Smith said. “You can’t just own the entire index.” Emerald declined to provide specific stock picks for the coming year. Goldman Sachs analysts see AbbVie, Biogen, Johnson & Johnson, Merck and Roche as potential acquirers. Merck is well-positioned with “capital, need and positioning” and a record of recent dealmaking success, while Johnson & Johnson may be able to “acquire a value target” after a series of smaller deals. Insmed: A critical year ahead Insmed is a buy-rated stock on Goldman’s punish list and the firm’s analysis suggests it could be an attractive acquisition target. According to FactSet, shares are up about 125% in 2024, and all analysts who cover the rare disease researcher call it a buy or overweight. On average, analysts see a more than 28 percent upside from Friday’s close. Next year is “poised to be another year of value creation for INSM through both commercial execution and clinical data catalysts,” Goldman analyst Andrea Newkirk wrote in a research note earlier this month. INSM YTD Mountain Insmid shared year-to-date He explained that the firm’s $5.9 billion peak global sales estimate for brinsocitab “likely” understates the drug’s true potential. She expects it to be approved by the middle of next year for the treatment of a chronic lung condition called bronchiectasis, but its wider use for other diseases could lead to further growth. Insmed also has other respiratory assets in its portfolio, which could boost annual peak sales to $8.2 billion, he said. Barclays analyst Leon Wang also likes Insmed, but is focused on clinical data expected in the second half of next year for treprostinil palmitil inhalation powder, or TPIP, for pulmonary arterial hypertension, or high blood pressure in the lungs. . “We are positively biased on this readout and find Tyvaso’s high efficacy relative to standard of care,” Wang wrote in a note to clients in mid-December. “… Overall, 2H25 could transform INSM into a multi-commercial product company launching pivotal studies in two major indications.” Legend Biotech: In the oncology space, many Wall Street analysts are optimistic about the outlook for Legend Biotech. Shares of the CAR-T specialist have fallen 46% year to date, but the average price target, as compiled by FactSet, expects the stock to rise 147% from Thursday’s close. LEGN YTD Mountain Legend Biotech shares year-to-date “LEGN stock was punished on what we see as an unfair comparison to clinical data vs. [ Arcellx’ s] Anito Cell, as well as lingering concerns over China risk, especially given the new administration coming in in January 2025,” Barclays analyst Jenna Wang wrote, citing clinical data that rival Arcelex reported to the American Society. of Hematology Conference Dec. 9. “We believe the facts speak for themselves, and we expect. [Legend’s] Carvicati launches in 2025 with potential ~100% y/y growth for both 2025 and 2026, on-track implementation of manufacturing capacity expansion, early multiple myeloma line with potential positive CARTITUDE-5 data in 2025 “On-label expansion, as continued outstanding clinical profile with more mature data to set as industry leader,” Wang said. Piper Sandler. Named Legend one of its biotech focus stocks, the investment bank said there was room in the market for both Legend and its partner Johnson & Johnson, and Arcelix, which along with its partner Gilead Sciences, the ‘stick to what you can measure’ legend for all success, was among the names Morgan Stanley’s biotech analysts gave their 2025 outlook. “We expect products with current market position and label expansion to perform best in 2025,” the team wrote on Dec. 16. and Rhythm Pharmaceuticals, among others. According to Morgan Stanley, their key theme for 2025 is to “stick to what you can measure.” Legend is in the easiest bucket to measure, because it has an existing product with an opportunity to increase sales. The firm’s next bucket includes stocks like Insmed and Jazz Pharmaceuticals that either have recent drug approvals or upcoming product launches as key drivers. The final group they compiled was a list of companies that have “material milestones” that could lead to commercialization beyond next year. That more speculative group includes Rocket Pharmaceuticals, a company developing a treatment for Dannon’s disease, a rare, inherited disease that usually causes fatal heart problems. Rocket shares are down about 61% year to date, and consensus price targets suggest about 285% upside from Friday’s close, per FactSet. Morgan Stanley expects a catalyst for the stock in late 2025 when data from a Phase 2 trial for Rocket’s RP-A501 gene therapy is expected. These are just a sampling of the innovations that biotech analysts are seeing, and why they’re hoping to boost efficiency in the sector. “You can only have so many bad years, right?” Khudajamirin of Tema said. “Valuations are starting to look very attractive at some point. If you look at the health care sector in general, it’s trading at about a 23% discount to the S&P 500, one of the lowest discounts we’ve seen. One of the last 20 years for sure.”