We recently published a list of the 12 Biotech Stocks with the Biggest Upside Potential. In this article, we are going to take a look at where Merus N.V. (NASDAQ:MRUS) stands against other biotech stocks with the biggest upside potential.
Improving Trends for Biotech Stocks
While 2024 was a “challenging” year for biotech stocks, JPMorgan is of the view that some names in the industry may be poised for considerable upside in the coming months. On November 28, Johan Hueffer, senior partner and principal of investments at Novo Holdings, appeared on CNBC to discuss his macro perspective on investments in life sciences. He said that biotechs faced difficulty raising capital in the last couple of years. However, that trend has started to improve in the last quarter or two.
Still, there have been impacts on companies that particularly service the pharmaceutical industry, such as contract research organizations (CROs), contract manufacturing organizations (CMOs), and companies that provide tools for research and development. Similar trends have been observed for companies that manufacture tools for production in the pharmaceutical and biotech industries. While these sectors have had ups and downs in the past two years, the trends are starting to normalize now. Hueffer was of the view that the industry is now showing considerable opportunity.
The Fed’s Rate Cuts and Biotech Stocks: Could There Be a Connection?
Similarly, Goldman Sachs shed light on biotech as an often overlooked sector in the investing space. In a note to clients, John Flood, Goldman’s Head of Americas Equities Sales Trading, said that biotech stocks posed an under-the-radar opportunity for investors looking to capitalize on the Fed’s recent rate cuts. Changes in interest rates uniquely affect biotech stocks as they are sensitive to them and often rely on projected future profits. These stocks are also heavily impacted by the cost of capital. Although there is little to no current profitability, these stocks have significant upside potential and pose an “option-like structure” if clinical trials succeed. This makes them especially responsive to changes and movements in interest rates.
Since September, the Fed cut a full point off the funds rate. According to CNBC, the current market pricing is showing just one or two more moves lower in 2025. On January 8, CNBC reported that the Federal Open Market Committee (FOMC) members voted to reduce the central bank’s benchmark borrowing rate to the 4.25%-4.5% target range. However, they also slashed their outlook for expected rate cuts for 2025, bringing it down to two from four and assuming quarter-point increments. These changes are expected to affect biotech stocks.
Flood’s note also highlighted that the biotech industry has recently shown improved fundamentals, attributed to a more favorable regulatory environment and positive clinical outcomes. Despite these tailwinds, Goldman’s data reflects that biotechnology remains under-owned by hedge funds. The sector ranked in the 13th percentile in hedge fund long/short positioning over the past year. Furthermore, it ranked in the 4th percentile over the past five years.
Our Methodology
We used the Finviz stock screener to compile a list of 40 biotech stocks. We then selected the top 12 stocks with the highest analyst upside potential as of January 15, 2025. We have also included the market capitalization of the stocks as of the same date. The list is sorted in ascending order of analysts’ average upside potential. These stocks are also popular among elite hedge funds, as of fiscal Q3 2024.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small cap and large cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A scientist looking through a microscope conducting research in an immuno-oncology lab.
Merus N.V. (NASDAQ:MRUS)
Analyst Upside: 122.95%
Number of Hedge Fund Holders: 48
Merus N.V. (NASDAQ:MRUS) is a clinical-stage immuno-oncology company that discovers and develops bispecific antibody therapeutics. Its product pipeline includes Biclonics to treat solid and hematological tumors. On January 12, the company announced a research collaboration and license agreement with Biohaven Ltd. (NYSE:BHVN) to co-develop three novel bispecific antibody-drug conjugates (ADCs). The partnership is expected to expand the company’s portfolio.
The company attained FDA approval for its BIZENGRI® (zenocutuzumab-zbco) drug, the first and only treatment for adults with pancreatic adenocarcinoma or non–small cell lung cancer (NSCLC). This put the company on a positive trajectory.
Merus N.V. (NASDAQ:MRUS) strengthened its financial position in fiscal Q3 2024. It reported $433 million in cash and cash equivalents, up from $204 million at the end of 2023. This growth was attributed to successful public offerings and strategic partnerships. Merus N.V. (NASDAQ:MRUS) ranks fourth on our list of the 12 biotech stocks with the biggest upside potential.
TimesSquare Capital Management U.S. Small Cap Growth Strategy stated the following regarding Merus N.V. (NASDAQ:MRUS) in its Q2 2024 investor letter:
“Our preferences among Health Care stocks are those companies providing novel therapies for unmet needs that deserve premium pricing, or specialized service providers. A new addition this quarter is Merus N.V. (NASDAQ:MRUS), a clinical-stage immune-oncology biotechnology company. Their pipeline consists of several programs targeting solid tumors with various bispecific antibodies.”
Overall, MRUS ranks 4th on our list of the 12 biotech stocks with the biggest upside potential. While we acknowledge the potential of biotech stocks, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than MRUS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 20 Best AI Stock To Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article is originally published at Insider Monkey.