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Investing.com -- Citi initiated coverage on small- and mid-cap biotechnology companies on early signs of improving sentiment in a sector weighed down this year by policy uncertainty and weak investor interest.

The brokerage launched with Buy ratings on Acumen, Amylyx, Arcellx, NewAmsterdam Pharma, and Protagonist Therapeutics, and a Sell rating on Novavax (NASDAQ:NVAX).

It pointed to deep pipelines and catalysts expected in the second half of 2025 as reasons for optimism in selected stocks despite broader sector underperformance.

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, it added.

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.

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