The biotech industry has been on a roller coaster ride in recent years. The success of the Covid-19 vaccine showcased its innovation capability, helping draw record levels of investment and propelling initial public offerings (IPOs) to all-time highs. But then the industry was hit by surging inflation and sharp rises in interest rates, pushing it off the radar for most investors.
The time has come for a biotech comeback. The Federal Reserve has started to cut rates and the market is ripe for a broadening out from big tech into other under-loved sectors.
Valuations for biotech are very attractive. The Russell 2000 Biotechnology Index, a good proxy for small- to mid-cap biotech, is still 50% below the 2021 highs despite healthy long-term fundamentals for the industry.
The healthcare industry is set to boom over the coming decade and a substantial part of that will be driven by innovations in biotech. As people grow older and richer, demand for newer therapies will only increase – not least to treat diseases associated with ageing such as cancer and of wealthier societies, like diabetes.
We have seen robust pipelines and breakthrough therapies approved across many indications in recent years. Over the past year, there has been significant advancement in obesity treatment with the arrival of GLP-1 drugs. Next generation therapies are already on the horizon, such as GLP-1 combinations, oral GLP-1 drugs or amylin-targeted therapies. Early data have been promising and could further improve on weight loss efficacy or tolerability and the field remains one of the hottest areas for clinical trials and investor interest.
Another exciting area is cancer drug development, spurred on by new technologies and better scientific understanding. Promising advances include antibody-drug conjugate (ADC) products, in which a drug is coupled to an antibody that specifically targets tumour cells without damaging healthy cells. Bispecific antibodies can bind to not just one but two different types of cells (e.g. a cancer cell at one end and a T cell at the other) to activate anti-tumour responses.
Then there are improved cancer diagnostic technologies such as liquid biopsy, which identifies tumour DNA circulating in the blood, helping early detection and improving cancer prognosis.
At the same time, the advent of advanced artificial intelligence (AI) and other cutting-edge technologies makes it increasingly possible to create bespoke therapies. We believe biotech is by far the best-placed sector to benefit from AI, not least because it’s been an early adopter – there are already some 1,500 vendors in health AI – and because of the huge volumes of data and models the industry has generated on which to train AI systems.
AI has already made inroads into discovering possible cures for chronic diseases and has accelerated drug discovery. In just the past few years, Meta’s AlphaFold and rivals have predicted 600 million protein structures, which are key to drug development. By contrast, just some 200,000 were discovered in the 50 years before AI. This could prove a golden age of medical innovation and biotech will be at the forefront.
Such innovation is one key way for the pharmaceutical sector to address the cliff of patent expiries – affecting some $150bn of revenue over the coming few years. This creates a strong incentive for the bigger players to step up investment into research and development – but also into acquisitions of small, innovative companies. Which brings us to another key tailwind for the sector.
Mergers and acquisitions (M&A) in Europe and the US hit a record high in 2023 and we expect activity to remain strong over the medium term. Large-cap pharma companies have a lot of money on their balance sheets to deploy and the patent cliff presents a strong incentive for them to do so. As markets tend to price in the prospect of declining sales in advance of actual patent expiries, it is crucial for them to act now to demonstrate new pipelines to support future sales. The acquisitions are particularly attractive now given the favourable valuations.
For investors, this M&A boom creates an opportunity to generate alpha as some investments are snapped up by bigger firms at sizeable premiums.
We are also seeing renewed investment appetite for biotech, in both public and private markets which should further underpin the sector. In the first half of 2024, biotech secured $29bn in public funding – a 72% increase year-on-year, driven by high follow-on offerings.
IPOs are also showing signs of continued rebound from the 2022 lows, albeit at a much slower pace, indicating renewed investor appetite. Importantly, companies that are becoming public are of much better quality compared to the IPO frenzy in the 2020/2021 period.
While near-term macroeconomic conditions and Donald Trump’s presidency could bring some bumpiness along the way, biotech remains one of the most compelling sectors for investors with significant growth potential driven by cutting-edge innovation and attractive valuations.
Shaniel Ramjee is co-head of multi asset London at Pictet Asset Management. The views expressed above should not be taken as investment advice.