The Smid-cap biotech stocks to own in 2024, according to Bernstein

Discussing the biotech sector’s outlook for 2024, Bernstein says it expects continued valuation recovery as interest rates come down, a corresponding uptick in IPO activity, and M&A at levels like what was seen in 2023. Within its Smid-cap coverage, the firm is sticking with Vertex Pharmaceuticals (VRTX) and Alnylam Pharmaceuticals (ALNY) as top picks in 2024, followed by Intellia Therapeutics (NTLA).

TOPS PICKS: At the sector level, Bernstein expects continued valuation recovery as interest rates come down, a corresponding uptick in IPO activity, and M&A at levels similar to what the firm saw in 2023. Within its coverage, Bernstein is sticking with Vertex and Alnylam as top picks in 2024, followed by Intellia.

For Vertex, the firm has conviction in the upcoming acute pain readout, and sees ample sources of unpriced value elsewhere in the pipeline. With Alnylam, Bernstein expects HELIOS-B to be a significant binary event for the stock, with downside of about 50% if the trial fails, and a range of upside scenarios potentially as high as 40%-plus. The firm has conviction the trial will not only succeed but also clearly differentiate Amvuttra vs. stabilizers. Bernstein raised its price target on Alnylam to $220 from $216, while keeping an Outperform rating on the name. For Intellia, the firm expects investors to begin to focus more on the AATD Phase 1, where it has high conviction, and also expects some modestly positive readthrough from HELIOS-B.

Market Perform-rated BioMarin (BMRN) has a much better setup than in 2023, but Bernstein would like to see further clarity on the company’s strategy before considering an upgrade. With Elliott now involved, Bernstein believes M&A is the most likely driver of outperformance, if any, and updates its price target to $93 from $80 to reflect that scenario. Bernstein would not be surprised to see continued Voxzogo beats, but don’t think it’s enough on its own to move the stock.

WARMING UP TO BEAM, ARROWNHEAD: Elsewhere with the firm’s Market Perform ratings, Bernstein is warming to both Beam (BEAM) and Arrowhead (ARWR), but thinks it’s still a bit early. For Beam, the firm really likes the AATD program, but initial data won’t come until 2025, and it hesitates to recommend it into sickle cell data as it does not expect to clearly differentiate vs. Casgevy. Regarding Arrowhead, there is a lot happening – CV phase 3 starts, pulmonary data in multiple indications, and new trials kicking off in muscle and adipose, to name a few. But Bernstein doesn’t expect most of these to actually move the stock. Asthma PFT data is the one it feels best about, but even good data won’t refute concern that the space is too crowded. The firm raised its price target for Arrowhead to $32 from $27.

With Crispr Therapeutics (CRSP), Bernstein thinks Casgevy may eventually surprise investors positively, but the launch will take time, and the firm is uncomfortable with the current valuation. Meanwhile, the firm expects Allogene (ALLO) stock to lag the broader biotech sector “until we get closer to ALLO-501A initial pivotal data, but even that will probably not be enough to change the narrative.”

STILL BEARISH ON IONIS: Bernstein believes Street expectations for olezarsen and donidalorasen are too high and that the Street is also overly optimistic on the expense outlook, creating a valuation disconnect. This is a long-term call, not an active short, and the Ionis (IONS) stock likely trades up this year on HELIOS-B data, the firm adds. Bernstein raised its price target on Ionis to $37 from $31, but kept its Underperform rating on the shares.

PRICE ACTION: In morning trading, shares of Vertex and Alnylam have gained about 1% to $410.26 and $192.94, respectively.