In the biotech sector, the new year typically commences with a visit to the JP Morgan Healthcare Conference in San Francisco, one of the most significant annual events in our industry.
It gathers leading industry executives, policymakers and global investors to discuss business development, trends, innovations and investment opportunities within biotech and healthcare more broadly.
Fifteen years ago, arriving at the conference was a ritual in itself. It has often been used as a platform for major industry announcements, including significant acquisitions. So, back then, portfolio managers and analysts would touch down in San Francisco and immediately scan their BlackBerry for big deal announcements, usually timed to coincide with the start of the conference.
The baggage carousel would become a stage for whispered speculation and informal discussions about the implications of the latest transaction.
These days, thanks to in-flight Wi-Fi, the drama can unfold at 35,000 feet, which is perhaps more efficient but robs the conference of some of its nostalgic charm.
Nevertheless, we were not disappointed this year in terms of M&A announcements. News of Johnson & Johnson’s acquisition of International Biotech Trust’s largest holding Intra-Cellular Therapies for $14.6bn was exciting for us – the deal is the largest seen in the biotech industry since early 2023 and marks the end of a slight hiatus in activity perhaps linked to political uncertainty in the run-up to the recent US election.
Additionally, Lina Khan’s leadership of the Federal Trade Commission (FTC) since 2021 made larger deals challenging. Two major biotech-pharma deals were temporarily blocked due to the FTC’s anti-competitive concerns, which may have dissuaded other companies from pursuing significant transactions. But with a change of leadership, the FTC is expected to take a more industry-friendly stance.
However, the drivers of industry M&A remain strong. Biotech companies are an increasingly powerful force in healthcare innovation, accounting for 70% of new drug approvals in 2024, up from just 26% a decade ago.
This reflects both the biotech industry’s clear capabilities in drug discovery and development, as well as the pharmaceutical industry's retreat from internal research in favour of in-licensing or acquisitions.
Pharmaceutical companies face erosion of their revenues as their products reach the end of their exclusivity periods. There is also an increased number of blockbuster drugs reaching patent expiry over the next few years, so pharmaceutical companies’ reliance on the biotech industry is set to intensify. This suggests that M&A will return as one of biotech’s key drivers in 2025 and beyond.
Awaiting IPOs
Other topics of discussion at the conference included the initial public offering (IPO) pipeline. The IPO market has been lacklustre since the sharp market correction in 2021. We had been expecting this to improve as 2024 progressed, but the drought has continued. Follow-on equity financings have been numerous, IPOs less so.
Encouragingly, while it has remained challenging for private companies to float, the good quality companies appear to have no difficulty in accessing private finance to ensure their innovative drug development is not impacted by the equity market cycle.
Another factor behind the IPO drought is that many recent public offerings still are trading ‘below water’, which means they continue to trade at a level below the price at which they floated.
It is plausible that IPO activity will return as the political clouds start to lift but we do not see it as a necessary condition for a better year of performance from the biotechnology sector. Indeed, it may be that we need to see a better period of performance, boosting investor confidence in the sector, before the IPOs start to return.
Innovation abounds
Continued and accelerating therapeutic innovation was another prominent conference theme. As the data on drug approvals testifies, this is what the biotech sector excels at.
Towards the end of 2024, we observed an uptick in the number of clinical trial initiations and follow-on funding levels suggest this momentum should carry forward into 2025.
Valuations also remain compelling, with the proportion of biotech businesses trading below the value of their cash on balance sheet near a record high. This, and our confidence that we are now in a more supportive phase of the biotech investment cycle, has encouraged us to gradually shift our portfolio down the market capitalisation spectrum, with more than three-quarters of our portfolio now invested in companies valued at less than $10bn (i.e. small and mid-sized companies).
This money has been invested carefully, spread across a basket of stocks in each of our core thematic areas, and we have retained over 60% of the portfolio in companies that already have an approved product.
Regulatory relief
Political uncertainty also weighed on sentiment towards the biotech sector in 2024. This is not unusual for an election year, but president Donald Trump’s victory comes with its own uncertainties, particularly around some of his appointments.
For example, Robert F Kennedy Jr. has been confirmed as Secretary of Health and Human Services. While his scepticism towards vaccines caused initial unease, we do not think Kennedy will bring drastic change.
It appears increasingly likely that his focus will be more on health and nutrition rather than therapeutics, which, if shown to be the case, could provide near-term relief for the biotech sector.
Similarly, Trump’s appointment of Andrew Ferguson as FTC chair could pave the way for a more business-friendly approach to M&A. If this materialises, it may unlock greater deal activity, reversing the recent lull.
Overall, we have a positive view on the biotech sector as we enter 2025. Long-term structural drivers in healthcare remain intact and innovation continues to fuel growth for biotech in particular.
While political uncertainty persists, we believe the sector is well-positioned to navigate these challenges and thrive in the years ahead. Active stockpickers who know the sector intimately are well-placed to add value in this environment.
The fundamental tailwinds of demographic growth and accelerating innovation have enabled biotech to demonstrate impressive resilience in the face of political and economic shifts.
From the Affordable Care Act to the Inflation Reduction Act, the sector has consistently adapted and emerged stronger. For investors, the opportunity to participate in this long-term growth story remains compelling.
Ailsa Craig and Marek Poszepczynski are portfolio managers at the International Biotechnology Trust. The views expressed above should not be taken as investment advice.