Morgan Stanley views biotechnology as an area of the market that abounds with opportunity heading into 2023. “We expect potential M & A to be a supportive backdrop with innovation and new drug launches offering a strong outlook for mid-cap growth names,” analyst Matthew Harrison wrote in a note to clients Thursday. “Large caps remain attractive with defensive cash flows, but we expect risk appetite to return for selective SMIDs.” It’s been a painful year for the investors — and once high-flying growth stocks — as the Federal Reserve’s rate hikes lead to fears of a slowing economy. Going forward, Morgan Stanley recommends a core positioning in mid-cap growth names. These stocks offer downside protection but should also reap upside returns as risk appetite returns. Innovation within emerging technologies like gene and cell therapy should also offer further upside for the industry over the next year, Harrison said, highlighting relief from a stabilizing rate environment and supportive FDA. Morgan Stanley also expects mergers and acquisitions activity to pick up in 2023 given the piles of cash some companies have on hand. These stocks “are at an inflection with both significant revenue growth and a potential turn to profitability,” Harrison wrote. Here are some of the stocks Morgan Stanley recommends heading into the new year: Harrison named BeiGene among the bank’s biotech stock picks heading into the new year. Morgan Stanley expects the China-based company focusing on cancer treatment drugs to experience a “transformative year,” with its price target suggesting shares can rally about 52% from Thursday’s close. U.S.-listed shares of the stock are down about 28% this year, with the future investment case for BeiGene resting on the company’s Brukinsa cancer drug. This treatment for leukemia should drive significant revenue, and the stock, the bank wrote. Morgan Stanley included large-cap biotech stocks Regeneron and Biogen on its list, with shares poised to potentially rally 14% and 7.7% from Thursday’s close, respectively, based on Morgan Stanley’s price targets. Both stocks have outperformed the broader market this year, rising 20.5% and about 25.8%, respectively. A new study this week showed promising results from Biogen’s Alzheimer’s drug with Eisai known as lecanemab. The stock suffered earlier in the week on a report of a second possible related death. Morgan Stanley expects the company’s Alzheimer’s treatment to dominate, as “agent of choice,” when up against competitor Eli Lilly ‘s offering. Among small- and mid-cap stocks, Morgan Stanley views BioMarin as a top pick, saying it offers “one of the best growth portfolios” in the group, with shares poised to rally thanks to greater clarity in its gene therapy used to treat a type of hemophilia. “We expect 2023 to finally be the year that commercial upside can drive BMRN higher,” Harrison wrote. — CNBC’s Michael Bloom contributed reporting
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