I was singing the praises of capital markets days last week. Last Tuesday, I managed to get along to one held by RTW Biotech Opportunities (RTW ). The day was planned some time ago, but the timing was great as it gave the managers a chance to discuss the recently announced plan to merge RTW and Arix Bioscience (ARIX).

The management team behind RTW are largely North American but, when they launched the trust back in 2019, there was an intent to create a new UK base for their business to complement what they do elsewhere in the world.

The first speaker panel focused on the opportunity in the UK. We have four of the leading medical schools in the world and a great track record of cutting-edge bioscience in universities up and down the country. What we are not good at is turning those ideas into great British companies.

The problem is a lack of growth capital. You need a lot of time and money to shepherd a promising therapy from initial results in the lab, through clinical trials and to launch. There will be plenty of failures along the way, but success brings real rewards – both financial and medical.

As an aside, this is a pattern that is replicated in the UK technology sector too. It is a good reason for getting behind Herald Investment Trust (HRI ) in its fight against the arbitrageur stalking the investment companies sector.

As more generalist UK small cap funds shrink and move their portfolios up the market cap scale, HRI is a key provider of growth capital to small cap UK technology companies. Hopefully, the Mansion House reforms will provide some respite for this part of the market.

Back at the RTW event, Professor Sir John Bell, whose CV could take up most of this article – I suggest you Google him – talked about the short-termism of venture funds in the biotech space. It is not good enough to be thinking of flipping an investment at 2–3x cost two or three years after funding (however superficially attractive that might sound).

The beauty of a fund such as RTW is that it is evergreen. It is designed to be there across the whole lifecycle of a biotech company, with expertise in building companies from the ground up. RTW has done exactly that with two of its leading investments.

Rocket Pharmaceuticals is a gene therapy company that was established by RTW in 2015. It licensed in preclinical programmes where the team felt that there was a compelling proof of concept. Rocket is targeting rare diseases in cardiovascular and haematology, and because these are typically areas of unmet clinical need, the US Food and Drug Administration has given a number of its therapies ‘fast track’ designations designed to accelerate their approval.

Gaurav Shah, RTW’s CEO, shared some Phase I study data on its treatment for Danon Disease which cause heart problems amongst other symptoms. These early results are spectacular – gene therapies can offer cures for previously untreatable diseases.

In China, RTW has taken a different approach. Jixing Pharmaceuticals is bringing late-stage (and therefore, greatly de-risked) drugs into China and putting them through the testing and approval process required by the Chinese regulator. It is targeting therapies in cardiovascular and ophthalmology. The cash flow that these will generate will help support its plans to develop its own drugs.

A combination with ARIX would bring increased scale and portfolio diversification to RTW. The deal has also been structured to be NAV enhancing for RTW shareholders. ARIX investors saw a big jump in their share price, but this has faded somewhat in recent weeks.

There are questions as to whether ARIX investors will support the deal, as some value players on its register may have been hoping for a managed wind down of ARIX instead. However, the prospects of getting reasonable value for that fund’s unlisted exposures are not great in the current environment.

Biotech firms with promising pipelines are worth money if they have the backing to get drugs to market, but we are in the throes of one of the worst ever bear markets in biotech and the industry is starved of capital.

The biotech slump is a combination of the deflation of a bubble that was triggered by COVID and the general aversion to growth companies that has accompanied rising interest rates. It seems clear to me though that this has gone too far.

RTW point out that 35% of small (sub $10bn) biotech companies are trading below the value of the cash on their balance sheets. The performance of UK-listed biotech funds has suffered; International Biotechnology (IBT ), Biotech Growth (BIOG ), Syncona (SYNC ) and even the more widely diversified Worldwide Healthcare (WWH ) and Bellevue Healthcare (BBH ) have all lost money in NAV terms over the past three years. RTW has bucked the trend but only by virtue of its strong stock selection.

One big winner for the fund recently was Prometheus Biosciences. RTW’s manager co-led a fundraise for the company in 2020 that raised $130m and anchored another raise in March 2021 that brought in $218m. Prometheus had a focus on immumology and within its pipeline had a potential therapy for ulcerative colitis, Crohn’s disease and other autoimmune conditions.

Towards the end of last year, with good data coming from its clinical trials, Prometheus raised a further $500m at a valuation that provided a decent uplift for RTW. Finally, in April this year, Merck acquired Prometheus for $10.8bn. Ahead of that announcement, Prometheus was RTW’s largest investment. RTW made 11.8x its money, generating $99m of cash on total investment of $8.4m.

Mergers and acquisitions activity has picked up in the biotech sector in 2023 and RTW’s managers think that this could continue, highlighting $228bn of cash sitting on big pharma companies’ balance sheets.

Innovation is thriving, valuations are weak, now is a good time to be looking at the biotech sector. I can see RTW doing well with or without ARIX.

James Carthew is head of research at QuotedData.

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