A “standout” 2025 propelled by a resurgence in mergers and acquisitions (M&A) has put RTW Biotech Opportunities (RTW) in a bullish mood about prospects for further returns.

Fund manager Roderick Wong said biotechnology was “entering a new phase of maturity” with scientific breakthroughs enabling the emergence of a new cadre of profitable $50bn market leaders.

He said the £785m investment company, which joined the FTSE 250 in December, was also positioned to capture two “megatrends”. These were the acceleration of drug discovery using artificial intelligence (AI) and the high level of innovation from China that was providing global licensing opportunities at a faster and cheaper pace than ever before.

Wong’s comments came in annual results showing RTW made an underlying 35.7% return last year with a strong rebound in the second half more than offsetting the 6% decline in the first half.

That’s lifted net asset value (NAV) by 136% since the closed-end fund’s launch in 2019, nearly double the 69% return from the Nasdaq Biotech index.

Wong, managing partner and chief investment officer at RTW Investments, said the “pivot to growth” in the second half was underpinned by a stabilising policy environment in the US where the global portfolio finds most of its investments. “The resolution of tariff concerns through reshoring commitments and the Pfizer blueprint for drug pricing provided the clarity necessary for large pharma to deploy its massive balance sheet firepower,” he said.

M&A surged to US$126bn, more than double the previous year, helped by the US consumer watchdog Federal Trade Commission taking a “friendlier” stance towards deals in the sector while Medicare negotiations with the government became more “predictable”,

“We view this institutional alignment and the return of the strategic buyer as a structural tailwind that will continue to drive value realisation across our holdings,” said Wong.

RTW’s publicly listed holdings, which account for over 70% of assets, delivered a 46.1% return with gains in all areas of the portfolio that beat both the Nasdaq Biotech and the US smaller company benchmark Russell 2000.

Avidity Biosciences was its best performer, contributing 9.5% of the return after a knockout bid from Novartis of Switzerland. PTC Therapeutics and Stoke Therapeutics also did well from positive clinical trials of their treatments for rare neurologic and genetic diseases.

However, Rocket Pharmaceuticals, RTW’s former second biggest holding, crashed by around two thirds in May after the death of a patient in a trial testing its treatment for Danon disease, a rare, life-threatening genetic disorder that cause damage to the heart, skeletal muscles, and brain. From a 5.1% weighting at the end of 2024, it fell to just 1% of the portfolio in December, knocking 3.9% off the return. Despite this, Wong said his team remained committed to the long-term scientific potential of the Rocket platform that devised the RP-A501 treatment.

The private equity sub-portfolio, accounting for 24% of net assets, did less well, down 2% over the year. Wong said the “lag” was not unexpected as private company valuations often took a while to catch up with public equity rebounds. “However, the underlying fundamentals remain robust,” he said, pointing to the recent Series D-1 fund raising by Corxel as evidence of institutional investor support for the Chinese heart disease, stroke, obesity and diabetes specialist formerly known as JiXing Pharmaceuticals.

Royalty investments, in which RTW is just 2.3% invested, added 0.9% to NAV. Wong said these positions were an important diversifier, providing income and cash flows that were unconnected with movements in volatile biotech share prices.

RTW’s own volatile share price was eventually a benefit last year. Shareholders, which include activist hedge fund Saba Capital with a 5% stake, did better than the NAV total return suggests. They received 54.8% as the shares closed some of their gap to asset value with a discount narrowing to 12%, partly helped by buybacks by the board. The valuation gap has widened to 20% in the past month as the US and Israeli war against Iran has rocked global markets. That could look attractive if you consider Wong right in describing RTW as a “compelling vehicle” to capture the growth in drug developers.

Our view:

James Carthew, head of investment company research at QuotedData, said: “This was a decent set of results from RTW Biotech Opportunities even without a NAV contribution from its private investments. However, the managers seem optimistic about the prospects for that part of the portfolio and very upbeat about the sector as a whole. I am a happy holder.”

Stay a step ahead. Our daily newsletter brings you the latest on investment trusts and active ETFs. Subscribe here.