Biotechnology & Healthcare: a sector on the mend?
What’s the prognosis for biotech and healthcare companies? How will the US election impact the sector, and could we see a recovery later this year?
It’s only been a few years since all eyes were on the Biotechnology & Healthcare sector during the Covid-19 pandemic. Since then, however, performance has been mixed: the average discount of investment trusts in the sector sits at 15% and its return over the past year is just 3% compared to 11% for the average investment company1.
Despite this, Biotechnology & Healthcare was tipped for success by managers in the AIC’s fund manager poll at the end of the last year, with 15% expecting it to be the best-performing sector in 2024.
So what’s the prognosis for biotech and healthcare companies? How will the US election impact the sector, and could we see a recovery later this year?
To discuss these questions and others, a media roundtable was held today by the Association of Investment Companies (AIC) featuring Brett Darke, Portfolio Manager of Bellevue Healthcare Trust, Marek Poszepczynski, Portfolio Manager of International Biotechnology Trust, and Geoff Hsu, Co-Manager of The Biotech Growth Trust.
Their comments were collated alongside views from Gareth Powell, Co-Manager of Polar Capital Global Healthcare Trust, Roel Bulthuis, Managing Partner and Head of Investments of Syncona, and Woody Stileman, Managing Director – Business Development of RTW Investments, which manages RTW Biotech Opportunities.
Geoff Hsu, Co-Manager of The Biotech Growth Trust, said: “We believe the biotechnology sector is due for a comeback. The drawdown in biotech that started in 2021 has driven small cap biotech valuations to unprecedented lows, with many companies trading at market caps below the net cash on their balance sheets. This drawdown appears to have been driven by the rise in interest rates over the past few years, as the US Federal Reserve raised rates to combat inflation. Those interest rate headwinds appear to be abating.
“Importantly, we do not believe the valuation contraction that has been seen in the sector is justified based on the industry’s strong fundamentals, with a record number of drug candidates in the industry pipeline and a record number of drug approvals at the FDA last year. M&A activity is also accelerating as Big Pharma acquires biotech companies to address a revenue gap from anticipated patent expirations on their key blockbuster drugs in the second half of this decade.”
Marek Poszepczynski, Portfolio Manager of International Biotechnology Trust, said: “The biotech sector has been in a three-year bear market, the longest ever for the sector. Spring 2021 saw high valuations across equities and especially biotech, driven by the pandemic era and extremely loose monetary policies (rates at zero) and excitement over vaccines. After a short period of exuberant valuations, the market began to normalise but was further hit by rising interest rates. Then followed a protracted period of consolidation ending in a peak year for acquisitions in 2023. In recent months, we have seen green shoots such as the IPO window opening and an increased appetite for secondary financings especially for higher quality names.”
Roel Bulthuis, Managing Partner and Head of Investments of Syncona, said: “After facing a challenging period, the biotechnology and healthcare sector is showing signs of a recovery, particularly in the public markets. The XBI index has demonstrated a notable rally since Q4 2023, reaching highs not seen since 2022, in particular related to a return to value for late-stage assets, aligned with Syncona’s vision on value creation in the sector. There has also been a significant uptick in IPOs in the last six months alongside increased M&A activity. This positive traction has been enabled by the broader market recovery, as well as continued momentum in positive published clinical data and approvals. Whilst it is positive to see public market conditions improve, we continue to see challenges in the private financing environment, particularly for earlier-stage companies, where access to capital remains limited.”
Where are you finding opportunities?
Brett Darke, Portfolio Manager of Bellevue Healthcare Trust, said: “Investment opportunities are presenting themselves across all subsectors of healthcare. As the Bellevue Healthcare Trust has a broad healthcare investment mandate this allows us to exploit all such opportunities without being confined to a narrow subsector of healthcare.”
Woody Stileman, Managing Director – Business Development of RTW Investments, which manages RTW Biotech Opportunities, said: “Despite the end of year rally, 32% of sub-US$10bn market cap biotech companies in the US still trade at less than the cash on their balance sheets. For most of the last two years, we have been more attracted to opportunities in the public markets than privates, however, the opportunity set is more balanced now as private market valuations have also now adjusted, and the IPO window looks like it is re-opening. We have already seen half as many biotech IPOs in the first two months of this year as we saw in the whole of last year.
“Public or private, we believe that we are living through a golden age of innovation in our sector, built on a combination of cheap genetic information and the foundation of new modalities to address disease. Looking forward, we are excited about opportunities in several areas. Within metabolic disease, we eagerly await the first approval for fatty liver disease. In oncology, we have shifted our emphasis towards novel antibody technologies and cell therapy. We expect continued innovation in neurology, rare disease, and after a wave of historic breakthroughs, slightly more incremental advances in immunology. Like gene therapy last year, we are optimistic RNA medicines could make a comeback in 2024.”
Gareth Powell, Co-Manager of Polar Capital Global Healthcare Trust, said: “We are finding opportunities globally across all market cap bands and subsectors. The main drivers we are looking for are new product growth stories and companies that are exposed to increased utilisation.”
What are the challenges of investing in biotech and healthcare?
Roel Bulthuis, Managing Partner and Head of Investments of Syncona, said: “Investing in life sciences is inherently a high risk and high reward environment. In drug development, we deal with substantial technical risk – will the science translate to a meaningful product for patients? – significant and long-term capital requirements as well as regulatory hurdles. We undertake a rigorous due diligence process, which results in the identification of key scientific, commercial and regulatory risks and a clear plan to mitigate these. We employ a disciplined approach to capital allocation, with the ability to deploy across a range of financing strategies tailored to the asset and realisation strategy.”
Gareth Powell, Co-Manager of Polar Capital Global Healthcare Trust, said: “Stock specific risk is very high in this type of healthcare stock as product development is critical to their success. Another challenge is when there is volatility and markets are weak in small and mid-caps, particularly if financial conditions are tightening.”
Marek Poszepczynski, Portfolio Manager of International Biotechnology Trust, said: “There are a number of risks to consider when investing in biotechnology companies. Firstly, clinical, regulatory and commercial risk. Secondly, competitor environment risk such as when another company develops a better alternative for patients that renders a company’s product obsolete. There is also political risk going into an election or changes to legislation that directly impact the sector, such as the recent Inflation Reduction Act. Finally, there’s macro risk, including the impact that rising interest rates have on sectors such as biotech.”
Will the results of the US election make a difference for the sector?
Gareth Powell, Co-Manager of Polar Capital Global Healthcare Trust, said: “If it looked like there would be a blue wave like it appeared there was going to be in 2020, then yes we would be cautious and move the fund accordingly. However, that is not possible this time so we are fairly sanguine on the outcome.”
Geoff Hsu, Co-Manager of The Biotech Growth Trust, said: “While the presidential candidates may talk about their desire to lower drug prices during this election cycle, we believe most of this is just campaign rhetoric and noise. We do not expect any substantive legislation to be passed that would adversely affect drug prices in the near term, especially if there is a split government after the election with no party controlling both chambers of Congress and the presidency. Medicare price negotiation was already passed in 2022 as part of the Inflation Reduction Act, so the government has already passed legislation regarding drug pricing. We do not think they will take up the issue again in the next couple of years. From a regulatory standpoint, we believe the FDA will continue its constructive stance towards the approval of new drugs regardless of who is elected president.”
Brett Darke, Portfolio Manager of Bellevue Healthcare Trust, said: “Given that both frontrunners have recently run administrations, their attitudes towards healthcare are well understood by investors. Furthermore, given their commentary so far during the election campaign we don’t see the election itself making much of a difference to the sector.”
Woody Stileman, Managing Director – Business Development of RTW Investments, which manages RTW Biotech Opportunities, said: “As with all elections, you would expect there to be some noise on the campaign trail because drug pricing is popular with voters, however, we think that the bark and bite will likely be lower this year than normal. Firstly, drug pricing does not appear to be top of the agenda with items like immigration further up the electorate’s list of priorities. Also, with the passing of the Inflation Reduction Act in 2022, the sting has already been drawn to some extent.
“One of the Act’s key drug-related policies is a requirement for the Secretary of Health and Human Services to negotiate prices with drug companies for certain drugs covered under Medicare. The Centers for Medicare & Medicaid Services (CMS) announced the first ten drugs up for negotiation and will make offers soon. We think that the odds of similarly impactful legislation emerging to be very low.”
- ENDS -
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Notes to editors
- Source: theaic.co.uk / Morningstar. Average discount at 13/03/24. Average performance is share price total return in the 12 months to 13/03/24.
- The Association of Investment Companies (AIC) represents a broad range of investment trusts and VCTs, collectively known as investment companies. The AIC’s vision is for closed-ended investment companies to be understood and considered by every investor. The AIC has 334 members and the industry has total assets of approximately £272 billion.
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