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Biotech investors are bullish on small caps and moving into mid caps, with Merus (NASDAQ:MRUS) and Fusion (NASDAQ:FUSN) considered highly likely to outperform the broader market this year, according to a survey of investor sentiment conducted by TD Cowen.
The survey showed that 53% believe small-cap biotech stocks will outperform this year, versus just 26% in the fourth quarter. That said, only 53% believe stocks are currently undervalued, compared to 79% in the fourth quarter.
Investors also had very different opinions about how individual stocks performed this year.
Fusion was the top pick among the small caps most likely to outperform, followed by Alpine Immune (ALPN), Syndax (SNDX), SpringWorks (SWTX) and Krystal (KRYS). Revance (RVNC) is considered the stock most likely to underperform, followed by Krystal, Apogee (APOG), Agios (AGIO) and SpringWorks, TD Cowen said.
Investors were a little less optimistic about mid-cap biotech companies, with 44% viewing them as undervalued and 41% as fairly valued. However, 50% believe mid-cap companies have outperformed the broader market, while only 16% believe they would underperform.
Merus is believed to be most likely to outperform this year, followed by Sarepta (SRPT), Apellis (APLS), Axsome (AXSM) and Biohaven (BHVN). On the other hand, Arrowhead (ARWR) was chosen as the most likely underperformer, along with Apellis, Ionis (IONS), Sarpeta and Merus, TD Cowen said.
In large caps, 66% of respondents said they considered the group fairly valued, up from 52% in the fourth quarter. While 44% expect large caps to perform in line with the broader market this year, only 19% believe they would outperform, while 38% believe they would lag behind.
Respondents pointed to Alnylam as the most favored to outperform the broader market, followed by argenx (ARGX), Amgen (AMGN), Vertex (VRTX), and UCB (OTCPK:UCBJF). Gilead (GILD) and Moderna (MRNA) are the least likely to perform, followed by Alnylam, Amgen and Vertex.
Meanwhile, investors are optimistic that 2024 will see at least the same M&A activity as last year, with 29% expecting an increase in the number and size of deals, 50% expecting them to remain at par with 2023 and 21% predicting a decrease. .
Respondents said they believe Xenon is most likely to be acquired in the next six months, followed by MoonLake (MLTX), Alpine, Madrigal (MDGL), argenx, Blueprint Medicines (BPMC), Arcellx (ACLX), BioCryst (BCRX), and VaxCyte (PCVX).
The IPO market is also expected to heat up. The survey showed that 37% were more likely to participate in an IPO this year, while 53% said their level of interest remained unchanged.