Biotech’s recovery is underway. And investors are about to miss it

A year ago, this column made the case for investing in biotech. The sector was in the early stages of recovery: maturing innovation was leading to more drug approvals, yet valuations were depressed and a wave of patent expiries was forcing large pharmaceutical companies to acquire. The thesis was right. But for most investors, it has played out quietly in a market they were not watching closely.

Biotech is growing up

For years, the standard objection from generalist investors was that biotech was made up of loss-making development-stage companies too risky to own. But that objection is diminishing. The sector turned profitable in aggregate in 2025. Morgan Stanley analysed 86 small- and mid-cap biotechs and found that, while the group was expected to lose around $900 million in 2026, it is forecast to earn $5 billion in 2027, rising to nearly $40 billion by 2030.

Cantor analysts put numbers on the structural shift. Around 40% of the companies in the XBI, the biotech index, already have approved drugs. With further readouts expected over the next twelve to eighteen months, Cantor estimates that more than 80% of XBI constituents could have approved drugs by the third quarter of 2027. That is a sector that is in a different phase of its life compared to the one most generalist investors think they know.

The shift is visible in individual company results too. Madrigal Pharmaceuticals reported 127% year-on-year revenue growth in the first quarter of 2026 for Rezdiffra, its treatment for liver disease, confounding predictions that GLP-1 weight-loss drugs would undercut its market. And the sector is producing companies of genuine scale. Alnylam, argenx and UCB, all built on novel biologic platforms, now carry market capitalisations in excess of $40bn. These companies have matured into large, profitable businesses that happen to sit in an index most institutional investors still treat as a niche.

Meanwhile the S&P 500 sits near all-time highs. Biotech remains well below its 2021 peak. That performance gap will not persist indefinitely.

Why oncology matters now

The US Inflation Reduction Act of 2022 created what the industry now calls the “pill penalty”. Traditional oral cancer drugs, the small molecules that dominated oncology for decades, faced loss of patent exclusivity after a shorter period versus their biologic competitors. For large pharmaceutical companies deciding where to invest, that difference changed the calculus sharply and simply made small molecule cancer treatments uncompetitive; industry-funded oncology trials fell significantly and capital shifted away.

For biotech, a positive aspect of the pill penalty was the redirection of capital into novel therapies. The companies that kept investing were smaller, more specialised biotechs, working on next-generation approaches that the large pharma model was less suited to anyway: antibody-drug conjugates, bispecific antibodies, cell therapies and precision approaches targeting specific genetic mutations. These are biologic medicines, with longer commercial runways and, in many cases, better suited to the cancers that small molecules could not crack.

Those programmes take years from funding to clinical data. Many of the most significant were started before the IRA changed the rules. That data is now arriving. ASCO, the world's largest oncology conference, took place in Chicago in May, and the 2026 meeting featured a notably high proportion of next-generation assets from smaller biotech companies. Pancreatic cancer, one of the hardest to treat, is seeing targeted biologic approaches reach late-stage readouts for the first time, with five-year survival still only around 14% in most cases. Bladder cancer and second-line breast cancer pipelines are similarly active. A significant portion of the most meaningful late-stage data this year is coming from biotechs, not large pharmaceutical companies. That shift matters for investors.

The deal market is reopening

Last year this column flagged the scale of patent cliffs facing large pharmaceutical companies, with an estimated $500 billion of drug revenues at risk as blockbusters lose exclusivity over the coming decade. Those companies have approximately $1 trillion in dry powder with which to make acquisitions and only Western biotech has the late-stage assets they need to fill the gaps.

The pace of action has picked up considerably. Biotech M&A reached just over $40 billion in the first quarter of 2026, up from $26 billion in the same period a year earlier. The IPO market has reopened in parallel: by early May, ten biotech IPOs had raised just over $3 billion year-to-date, against five deals raising under $1 billion at the same point in 2025.

How RTW Biotech Opportunities is positioned

RTW Biotech Opportunities has been a direct participant in both trends. Its portfolio generated a range of exits and liquidity events in the first months of 2026, reflecting the breadth of activity in the sector. Aktis Oncology was the first biotech IPO of the year. Boston Scientific's $14.5 billion agreement to acquire Penumbra was the first major M&A transaction of the year. Both were RTW portfolio companies.

Kailera’s IPO in May illustrates RTW Bio’s approach most clearly. Kailera was co-founded by RTW Investments, the manager of RTW Bio, as a new company creation, built from the ground up around a specific scientific thesis. It went on to raise $719 million in the largest IPO in biotech history. For RTW, it demonstrates the full lifecycle model: not just identifying early-stage opportunities but creating companies, building them operationally and bringing them to market. Further newco launches are planned for 2026.

RTW Bio has been listed on the London Stock Exchange since 2019 and invests across the full company lifecycle,from early-stage private companies through to public biotech. RTW Investments had $8.6bn in assets under management as at 31 March 2026, with approximately half the investment team holding MD or PhD qualifications. Over the year to 30 April 2026, RTW Bio delivered 48% in net asset value and 82% in share price total return, against 68% for the Russell 2000 Biotech Index and 45% for the Nasdaq Biotech Index.

Biotech’s revenue growth is increasing at rates comparable to the tech sector, while trading at a fraction of the valuations generalist investors apply to tech stocks. That comparison will become harder to ignore as innovation matures and the sector continues to generate significant revenues. The sector has changed. Valuations have not yet caught up. That tends not to last.