These Biotech Names Are Thriving
As market action stands mixed to start the week, I like what I'm seeing from these biotech positions.
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Market action is mixed with a negative bias on Monday as some of the index rebalancing pressure is reversed, and positioning for upcoming earnings starts to take hold. The Magnificent Seven names continue to do well, but the semiconductor-related names, including Nvidia NVDA, are struggling. Small caps IWM are lagging with a loss of around 1%, which is weighing on breadth, but there is some relative strength in biotechnology (IBB).
One of the problems that the market is dealing with today is that interest rates are higher and bonds TLT are under pressure. This is likely due to the increased likelihood of a Donald Trump victory in November after the Joe Biden debate debacle. While Trump is generally believed to be positive for economic growth, there is concern that he won't cut spending much and tax cuts will hurt the budget deficit in the near term. Trump is not viewed as fiscally conservative by the bond market.
I continue to look for signs of stronger rotation into small caps, and I like the biotechnology action we are seeing today. Many of these names were pounded due to the rebalancing of the XBI, which shifted from equal weight to capitalization weighted.
One of my favorite small biotechs, Humacyte HUMA, had some huge blocks traded at the close on Friday and seems to have rid itself of that overhang. It got good news from the FDA about an additional application of its artificial blood vessel technology. I'm very bullish on this name in the longer term.
Another small biotechnology name that is of interest is Mereo BioPharma Group MREO. MREO is a U.K.-based biotechnology company that focuses on drugs for rare and specialty diseases.
It has two key drugs in development. The first is Setrusumab, which is used for rare brittle bone disease. It has partnered with Ultragenyx Pharmaceuticals RARE for development and issued very positive phase two/three data on June 11, 2024. There should be pivotal data released late in 2024 or early 2025, but so far, the results are exceptional
The other key drug is Alvelestat, which treats a rare form of lung disease. The company is preparing for a phase three study and is likely looking for a partner similar to Ultragenyx for this drug. That is the biggest short-term catalyst for the stock and could come at any time.
Analysts recently upgraded their expectations for the company following the recent news. There are five buy recommendations with an average price target of $6.80, which is 88% higher than the current price. Robert Baird initiated coverage with a "buy" and an $8 target and stated that "an Alvelestate partnership could represent a surprise catalyst."
Technically, the stock jumped on the phase two Seetrusumab news and analyst comments but pulled back to a trading range around the $3.50 level. There is strong support in this area, and it looks like a low-risk entry area. The stock could languish for a while as it awaits news, but the attractive valuation should provide support while I wait.
I'm hopeful that we will see a greater focus on stock picking in the weeks ahead, but for now, the Magnificent Seven names are still a safe haven for many investors.
At the time of publication, DePorre was long HUMA, HUMAW and MREO.
