RTW Venture (RTW ) believes the storm is passing in the heavily sold-off biotech sector after a string of positive market reactions to clinical trials lifted the life sciences fund by 9.4% in December.

The biggest boost for the £220m Guernsey investment company came from Prometheus Biosciences. Shares in the Nasdaq-listed inflammatory disease specialist soared 225% after the company reported good phase two data for its antibody therapy. This pole vaulted the stock from fourth to top place in the portfolio, where it accounts for just over 15% of assets. 

Avidity Biosciences moved up from sixth to fifth place at 4.2% of net asset value (NAV) after its shares jumped 90%. This followed a successful phase one trial proving the concept of its antibody-siRNA therapy for myotonic dystrophy, a genetic condition that causes progressive muscle weakness and wasting.

The new year continued the good news flow with UK pharma giant AstraZeneca (AZN) agreeing to buy CinCor, a cardiovascular specialist, at a whopping 206% premium. Its shares, in which RTW had a 1.8% weighting, leapt 144%.

All three companies sat in RTW’s core public portfolio which represents 46.3% of NAV. Many of these started as private companies, where the fund is still a big investor, allocating nearly a quarter of assets. The remaining 30% is in other publicly traded healthcare stocks. These non-core positions are held instead of cash and are designed to be sold quickly when more exciting opportunities become available.

Managing director Woody Stileman (pictured below) said valuations in RTW’s small and medium-sized company hunting grounds were at record lows, with one-third of these sub-$10bn companies trading at a discount to the net cash on their balance sheets and two-thirds valued at just 2x cash.

Stileman took heart from the market’s positive reaction to the spate of good news which he said was a complete reversal of the second quarter last year when share prices fell, whatever progress a company was making. 

‘The market was shying away from companies that were releasing good data earlier in the year because it knew they would have to come to the market and raise capital and there were concerns about the provision of capital for the sector. Now, good news is leading to good share price outcomes,’ he said.

‘All of these things lead us to believe that we’re in the early innings of a recovery and that’s backed up by the fact that large-cap biopharma was up last year.’

In the second quarter of last year, mergers and acquisitions (an indicator of the health of the sector) had its best quarter since 2018, with 15-20% of the small and medium-sized company market receiving or reported to have received bids over the summer.

The pickup in M&A levels can be put down to the US Inflation Reduction Act of August last year. Its drug pricing component starts in 2026 at the same time as large pharmaceutical companies will see a number of big drug patents expire. To plug the gap in their revenues, they will have to buy smaller drug developers, ‘which leads us to a slightly more positive outlook,’ Stileman said.

Last year, the US Food and Drug Administration (FDA) approved 39 drugs, a decline on the 50 the regulator passed in 2021. However, 13 of those, the highest portion ever, Stileman said, were the type of innovative medicines or gene therapies that RTW focuses on.

‘Despite the headline FDA approvals being lower year-on-year, and that’s probably because they’re still suffering from a Covid hangover, within that the innovation component was significantly higher and that for us is encouraging,’ he explained.

RTW is not introducing gearing, or borrowing, to back up its more positive outlook, largely because the sector was ‘volatile enough’ and returns over the years have been ‘more than enough for us not to have to consider gearing to augment them,’ said Stileman.

RTW has had a wild ride since floating in October 2019. From their $1 listing, shares in the specialist closed-end fund peaked at $2.44 in February 2021 before crashing to a low of $1.01 last summer. They have recovered to $1.29 but trail at a 22% discount to Numis Securities’ estimate of $1.65 NAV per share, which analyst Gavin Trodd said offered an interesting opportunity.