Biotech stocks are experiencing a resurgence thanks to a surge in biotech mergers and acquisitions (M&A). After a challenging year, both the SPDR S&P Biotech ETF (XBI) and the iShares Biotechnology ETF (IBB) have seen significant improvements. XBI has gained 5.6% this year, while IBB has risen 1.9%. Although these numbers still lag behind the S&P 500’s 24% rise, the recent rally is noteworthy. In just two months, IBB has recovered from a 13% drop to an 18% increase, and XBI has jumped 32% since its 20% decline.
The recent upswing can be attributed to several factors. Biotech companies, particularly smaller ones, often rely on borrowed capital to fund research efforts in pursuit of groundbreaking drugs. Therefore, when the Federal Reserve increases interest rates, these companies struggle as the cost of borrowing money rises. It is no coincidence that the biotech sector’s turnaround coincided with the Fed’s shift from rate hikes to potential rate cuts.
However, another key factor driving the rebound is the return of biotech M&A activity. Bristol Myers’ $4.1 billion acquisition of RayzeBio and AstraZeneca’s $1.2 billion purchase of Gracell are just the latest examples of this trend. In fact, there have been nine biotech acquisitions worth $1 billion or more announced since October. This increased M&A activity bodes well for further gains in the biotech sector.
Katie Stockton of Fairlead Strategies predicts additional upside for XBI. She highlights that the ETF has broken through resistance and shows signs of further momentum after a “flag pattern” on Friday. Furthermore, XBI’s performance relative to the S&P 500 has surpassed its 200-day moving average, indicating potential support for a continued reversal and growth in biotech stocks in the coming months.
However, the critical factor influencing the biotech sector’s future is continued cooperation from the Federal Reserve. As long as the Fed maintains its favorable stance, the outlook for biotech stocks remains promising.
