Ailsa Craig and Marek Poszepczynski, portfolio managers of the International Biotechnology Trust
The biotech sector, while sensitive to broader market dynamics, has its unique cycles of highs and lows. The industry experienced a significant valuation bubble during the pandemic, which, when compounded with rising interest rates, presented a substantial challenge. However, the tide may be turning this year.
The Nasdaq Biotechnology Index (NBI) just managed to avoid a third consecutive year of decline, thanks to a late-year rally. Despite recent performance, the index remains nearly 20% below its peak in 2021 which suggests there is considerable room for growth.
Potential for improvement is supported by the sector’s rapid pace of innovation and increased competitiveness, following a period of extensive consolidation and restructuring over the last three years. These factors collectively reinforce the biotech sector’s promising outlook despite its recent struggles.
Biotech in 2024
M&A activity shows encouraging signs of recovery. January and February of 2024 saw eight deals with a combined value of nearly $13bn versus six deals with a value of $4.5bn in the same period of 2023, and the total value of M&A deals in the sector in 2023 was $143bn, around double the $72bn’s worth of deals in 2022.[1] This trend is driven by the patent expiries which leads larger pharma players to look towards the biotech sector for opportunities to plug holes in their product pipelines.
The Inflation Reduction Act (IRA) is set to further amplify demand for more innovative biotech businesses with promising pipelines, marking a new era of drug price negotiations, and potentially leading to more acquisitions by larger pharmaceutical companies to counterbalance any potential revenue shortfalls.
Additionally, the possibility of interest rate cuts by the Federal Reserve would ease the cost of financing deals and product development. This is likely to lead to a resurgence of initial public offerings (IPOs), signalling improved sentiment towards the sector.
Furthermore, encouraged by these developments, the sector is experiencing a significant revival in fundraising efforts, with drug developers accessing $6.9bn in secondary equity raisings in February alone. This surge in funding represents the highest monthly secondary equity financing in any month over the past four years and marks a sharp turnaround following a two-year period of reduced deal activity.
Upcoming breakthroughs
The number of new drug approvals is currently robust and increasing, with biotech companies targeting conditions once deemed untreatable. This trend underscores the rapid innovation within the sector and its vast potential for investors. This sets the stage for 2024 to see notable launches.
Among these, the field of obesity treatments is gathering interest. Novo Nordisk’s Wegovy and Eli Lilly’s newly approved Zepbound are at the forefront. These treatments are expected to perform well, driven by high market expectations and consistent demand. However, they face challenges, including supply constraints and ongoing debates about coverage costs. Unlike treatments for cancer, Alzheimer’s, or heart disease, financing obesity treatments remains contentious, often perceived as addressing a lifestyle choice rather than a medical condition. Investors, therefore, should closely monitor developments in medical insurance reimbursement policies.
Another critical development is Alzheimer’s disease management, where dementia cases are projected to more than triple to 152 million by 2050. This underscores the urgent need for disease-modifying treatments capable of halting or slowing the progression of this debilitating condition.
In this context, the launch of Biogen and Eisai’s Leqembi stands out as a landmark event. After receiving FDA approval last year for its ability to slow cognitive decline in early Alzheimer’s patients, Leqembi has its first full year on the market in 2024. Its success will hinge on both its ability to meet this high unmet medical as well as market reception and its safety profile.
Trailblazing trials
In January 2024, the healthcare sector paid close attention to the latest results for Vertex Pharmaceuticals’ non-addictive acute and chronic pain treatments. These treatments are particularly significant as they address a critical need for alternatives to opioids. With 60 million people estimated to be affected by opioids addiction and more than 100,000 people dying annually from opioid overdoses, this is a pressing issue for policymakers and society.
Although Vertex’s drug was confirmed safe and non-addictive, its performance in managing acute pain wasn’t significantly better than existing treatments, tempering enthusiasm. Despite this, there is still high hope for its potential in treating chronic pain, with future findings from chronic pain studies anticipated beyond 2024.
In conclusion, there are sound reasons to expect more positive performance from the biotech sector in 2024 and beyond. Current valuations are appealing, and the sector continues to innovate rapidly. Widespread consolidation has generally enhanced the quality of the sector’s offerings. It remains crucial, however, to adopt a selective strategy when navigating the biotech landscape and to invest in biotech businesses with pioneering technology, promising future profitability and the ability to transform patient lives.
International Biotechnology Trust plc Risk Considerations
Capital risk / distribution policy: As the Company intends to pay dividends regardless of its performance, a dividend may represent a return of part of the amount you invested.
Concentration risk: The Company’s investments may be concentrated in a limited number of geographical regions, industry sectors, markets and/or individual positions. This may result in large changes in the value of the Company, both up or down.
Currency risk: The Company may lose value as a result of movements in foreign exchange rates, otherwise known as currency rates.
Gearing risk: The Company may borrow money to make further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase by more than the cost of borrowing, or reduce returns if they fail to do so. In falling markets, the whole of the value in that such investments could be lost, which would result in losses to the Company.
IBOR risk: The transition of the financial markets away from the use of interbank offered rates (IBORs) to alternative reference interest rates may impact the valuation of certain holdings and disrupt liquidity in certain instruments. This may impact the investment performance of the Company.
Liquidity risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. In difficult market conditions, investors may not be able to find a buyer for their shares or may not get back the amount that they originally invested. Certain investments of the Company, in particular the unquoted investments, may be less liquid and more difficult to value. In difficult market conditions, the Company may not be able to sell an investment for full value or at all and this could affect performance of the Company.
Market risk: The value of investments can go up and down and an investor may not get back the amount initially invested.
Operational risk: Operational processes, including those related to the safekeeping of assets, may fail. This may result in losses to the Company.
Performance risk: Investment objectives express an intended result but there is no guarantee that such a result will be achieved. Depending on market conditions and the macro economic environment, investment objectives may become more difficult to achieve.
Share price risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. This means the price may be volatile, meaning the price may go up and down to a greater extent in response to changes in demand.
Smaller companies risk: Smaller companies generally carry greater liquidity risk than larger companies, meaning they are harder to buy and sell, and they may also fluctuate in value to a greater extent.
Valuation risk: The valuation of some investments held by the Company may be performed on a less frequent basis than the valuation of the Company itself. In addition, it may be difficult to find appropriate pricing references for these investments. This difficulty may have an impact on the valuation of the Company and could lead to more volatility in the share price of the Company, meaning the price may go up and down to a greater extent.
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[1] Biopharma Dive – biotech M&A transactions greater than $50m
