The biopharma stocks to own in 2024, according to Morgan Stanley

Looking ahead to 2024 and what to expect for the biopharma sector, Morgan Stanley identified four themes it believes will be in focus next year: “diabesity,” product cycles, policy, and rates. At a single stock level, the firm expects another year of dispersion and generally continues to focus on companies that can deliver growth in the second half of the decade. Morgan says it is “sticking with what worked in 2023” as it remains Overweight-rated on AbbVie (ABBV), Biogen (BIIB), and Eli Lilly (LLY), and Underweight-rated on Bristol Myers (BMY).

FOUR THEMES FOR 2024: Discussing the outlook for the Biopharma space, Morgan Stanley says it sees four themes for 2024. The first of them is “diabesity,” where it believes updates from the coming year will result in further appreciation of the commercial opportunity. The firm notes that Eli Lilly and Novo Nordisk (NVO) are establishing increasingly strong leadership positions in “diabesity.” Product cycles will also be in focus in 2024, says Morgan Stanley, noting that they are a key driver of the industry. These include Alzheimer’s disease with Biogen/Eisai’s (ESAIY) Leqembi and Lilly’s Donanemab Q1 2024 PDUFA date, Johnson & Johnson’s (JNJ) multiple myeloma portfolio, Merck’s (MRK) Sotatercept for pulmonary arterial hypertension, and Vertex (VRTX)/Crispr Therapeutics’ (CRSP) Casgevy for sickle cell disease.

Regarding policy, the firm sees generally limited implications of the outcome of the 2024 U.S. election for the Biopharma sector given prior passage of the Inflation Reduction Act and associated changes to Medicare/Medicaid drug pricing negotiations. Lastly, rates will likely be one input with respect to appetite/performance for Smid-cap biotech as well as the stocks Morgan covers with higher leverage.

STICKING WITH WHAT WORKED IN 2023: The firm expects another year of dispersion in 2024 at a single stock level, and generally continues to focus on companies that can deliver growth in the second half of the decade. For now, Morgan Stanley is largely sticking with what worked in 2023 as it remains Overweight-rated on Eli Lilly, where it raises its estimates on its continued bullish outlook for the company’s “diabesity” franchise; and Underweight-rated on Bristol Myers, where it remains more conservative on the company’s new product cycles and lowers its estimates on a new margin analysis. AbbVie’s EPS will trough in 2024, says the firm, which expects Skyrizi and Rinvoq to drive growth and is encouraged by the steps the company is taking to bolster its pipeline via recent ImmunoGen (IMGN) and Cerevel (CERE) deals. Lastly, Morgan Stanley likes the setup on Biogen as the company has two new product cycles — Leqembi for Alzheimer’s with partner Eisai and Skyclarys for Friedreich ataxia — and pipeline optionality in ALS.

FAVORABLE M&A CONDITIONS: The firm projects that there are about $180B in revenues from legacy franchises that begin coming off patent by the end of the decade amongst the U.S. large cap Biopharma companies. While biopharma companies are advancing internal pipeline drugs, the majority will also need to supplement via M&A. Given the magnitude of the upcoming LOEs, the strength of balance sheets across the industry and the choppiness in Smid biotech, the firm believes the conditions for M&A are favorable. Within its coverage, Morgan sees Bristol Myers, Merck, and Johnson & Johnson as likely most active nearer term given management commentary and balance sheets.

PRICE ACTION: In Tuesday morning trading, shares of Abbvie, Biogen and Eli Lilly are fractionally up, while Bristol Myers’ stock has dropped about 1% to $50.67.