The biotech sector has shown signs of recovery in recent months, driven in part by favourable commercial performance and clinical readouts, according to RBC Capital Markets.
It recommends holding larger-cap names such as Biogen, Seagen, Genmab (CSE:GEN), Alnylam Pharmaceuticals (NASDAQ:ALNY), and CSL due to their expected revenue resilience and ‘less binary risk’.
The Canadian investment bank also suggests investing in high-quality, catalyst-driven mid- and small-cap companies such as Prometheus Biosciences, Pacira Biosciences, Sarepta Therapeutics, Ionis Pharmaceuticals (NASDAQ:IONS), and Intra-Cellular Therapies.
These, it reckons, may benefit from increasing regulatory permissiveness in key areas of innovation and M&A.
According to RBC, the sector is likely to maintain momentum into early 2023, but flatter earnings could limit upside as stocks approach fair valuations.
"We expect prescription drug demand for well-established commercial franchises to remain relatively inelastic, and see fewer 'binary' events for large caps now that lecanemab (Biogen), high-dose Eylea (Regeneron), and TROPiCS-02 (Gilead) data events are behind us," the firm said in a note.
It also highlighted a number of mid- and small-cap companies that it believes may perform well in the coming year.
These include 89bio, Morphic Holding, Pliant Therapeutics, BELLUS Health, Uniqure, BioArctic, and Agios Pharmaceuticals (NASDAQ:AGIO).
"Select high-quality, catalyst-driven mid- and small-cap companies should perform well, helped this year by increasing regulatory permissiveness in key areas of innovation and M&A, even if restructuring and dilution among weaker stories limits overall index performance," investors were told.
Overall, RBC noted that sentiment towards the biotech sector has improved, with the majority of surveyed investors expecting to maintain or increase their positioning in the sector.
"Just over half expect sector outperformance in 2023," it added.
However, RBC states that this sentiment is somewhat less bullish than it was earlier in the year, potentially indicating that momentum in the sector may slow in the coming months.