Lower Biotech Stock Entry Points Suddenly Become Available
Let's discuss a few as well as a recent change in a long-suffering sector name.
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The yield on the 10-Year Treasury has moved up from just under 3.9% at the start of February to 4.4% at the close of business on Friday. Sticky inflation and better-than-expected economic growth have been primary drivers of the increase. Oil and other commodities such as gold have also seen steep rises.
Meanwhile, investors have gone from believing at the start of the year that Fed Chair Powell would cut the Fed Funds rate six times in 2024 to hoping for at least two interest rate reductions later in the year. Given all of the above, the market has held up remarkedly well.
That said, rising interest rates have made the environment around commercial real estate increasingly dire. High-beta areas of the market have been hit, with the small-cap Russell 2000 Index dropping nearly 3% last week.
The air has also started to come out of the large biotech rally that started in late October. After cresting just over $100 in late February, the SPDR S&P Biotech ETF XBI has fallen back to the $90 level. We probably need interest rates to crest and come down or a significant uptick in M&A activity to reignite the "animal spirits" in this highly volatile part of the market.
The recent drop in the small biotech area has provided some better entry points for longer-term investors, however. Shares of gene-editing concern Intellia Therapeutics NTLA have recently dropped to the bottom of a trading range they have occupied for more than six months. The stock has bounced off this level several times now and I like the long-term potential of this name. In addition, options against the equity are fairly liquid and lucrative. I added additional holdings in the stock late last week via covered call orders.
Rocket Pharmaceuticals RCKT has dropped nearly 20% since late February as higher interest rates have undermined sentiment on the sector. Still, this company appears on track to receive its first FDA approval at the end of the quarter. Another Rocket candidate had its market application in Europe accepted for review earlier this month.
Rocket is also advancing several promising gene therapies for rare diseases within its pipeline, including one that could eventually be a blockbuster for a rare affliction called Danon disease. The company has a cash runway into 2026 and the stock could rebound into possible approvals in the months ahead.
Lastly, I would be remiss if I did not mention the recent change in sentiment on long-suffering ocular concern Aldeyra Therapeutics ALDX. The stock got upgraded by Oppenheimer last Wednesday and Perceptive Advisors recently added to its substantial stake in the biopharma stock.
In late March, Aldeyra management announced it would resubmit a marketing application for an eye disease therapy that it has developed with drug giant AbbVie ABBV. Aldeyra also has a cash runway well into 2026 if not beyond.
Three other analyst firms outside Oppenheimer have reiterated "Buy" ratings on the stock since word of the marketing resubmission came out. ALDX rose around 40% last week but the shares seem to have some momentum after being stuck in purgatory for quite some time.
At the time of publication, Jensen was long ALDX, NTLA, RCKT and XBI.
