Citi Initiates Coverage on Small- and Mid-Cap Biotech Companies: A Potential for Sector Recovery
In a recent move, Citi has initiated coverage on small- and mid-cap biotechnology companies, citing early signs of improving sentiment in a sector that has been weighed down by policy uncertainty and weak investor interest this year. The brokerage has launched with Buy ratings on Acumen, Amylyx, Arcellx, NewAmsterdam Pharma, and Protagonist Therapeutics (NASDAQ: PTXG), while assigning a Sell rating to Novavax (NASDAQ: NVAX).
Despite the broader sector underperformance, Citi's optimism in selected stocks is fueled by deep pipelines and catalysts expected in the second half of 2025. Biotech shares have lagged the broader market, with the SPDR S&P Biotech (NYSE: XBI) ETF down over 9% year-to-date, while the S&P 500 has gained nearly 3%. Citi said persistent concerns around U.S. drug pricing policy have weighed on the group but noted signs of "policy fatigue" among investors and a shift back toward company fundamentals.
While large-cap biopharma names such as Eli Lilly (NYSE: LLY), Vertex (NASDAQ: VRTX), and Gilead (NASDAQ: GILD) have led recent gains, Citi said small- and mid-cap stocks may begin to benefit if sentiment continues to recover. Recent deal activity and partnerships suggest a pickup in business development interest, and expectations of a U.S. interest rate cut in September could support further momentum.
Citi emphasized the potential of U.S.-based biotechs in areas such as immunology, cardiology, oncology, and rare neurological diseases. It cautioned against companies focused on respiratory vaccines, citing seasonality and political risk.
In summary, Citi's initiation of coverage on small- and mid-cap biotech companies suggests a potential for recovery in the sector, driven by deep pipelines, expected catalysts, and a shift back toward company fundamentals. However, investors should be cautious about companies focused on respiratory vaccines due to seasonality and political risk. The following image illustrates the potential for growth in the biotech sector:
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