We are living in a golden age of innovation in medical sciences. Biotech companies focused on the development of new medicines have long been recognised as a dynamic and promising investment area, offering life changing treatments for patients and secular growth for investors. The Nasdaq Biotech Index has outperformed the S&P 500 in 17 of the last 30 years, with biotech companies responsible for the majority of new drug approvals over the last decade.
The biotech sector came to the forefront of public awareness during the COVID-19 pandemic with the rapid development of vaccines, highlighting the sector’s capacity for innovation. Since then, macroeconomic factors, such as high inflation and interest-rate hikes, have acted as headwinds for the sector. However, we believe that it is now emerging from these challenges with strong secular and cyclical growth and attractive valuations, making now an attractive time for investors willing to navigate short-term volatility in exchange for considerable long-term growth potential. So, what are the tailwinds for biotech at the moment?
The demographic story
One of the most compelling factors is demographic trends. Globally, the senior population (ie, over 65 years old) is expected to double from 800 million in 2024 to 1.6 billion in 2050. In the US alone, almost 12,000 people a day turn 65, bringing an increase in chronic conditions and age-related diseases. This is in turn driving demand for innovative healthcare solutions – creating significant opportunities for biotech companies developing cutting-edge treatments.
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Maturing innovation leading to more drug approvals
The advent of cheap genomic sequencing data and new technologies to treat diseases is delivering new medicines that extend or improve patients’ lives. This process is much like how the declining cost of microchips and the building out of fibre networks provided the foundation for the information technology boom of the 2000s. It has led to tremendous progress in developing new treatments for conditions that have historically been difficult to address, such as cancer and obesity.
Next-generation anti-obesity drugs offer one of the most exciting investment opportunities and are potentially the first healthcare innovation to create over US$1trn in value. Obesity is the most common disease in Western society, with over 100 million obese people in America alone and more than 764 million globally. It is a major risk factor for many chronic diseases such as diabetes, hypertension and liver disease, as well as cardiovascular conditions such as heart disease and stroke, which are the leading causes of death worldwide. Recent outcome studies from some of the currently available obesity drugs are showing 20-30% improvements in some of these diseases. So, clearly, the health impacts of the obesity drugs go well beyond diabetes and weight loss.
There are multiple other new product waves with large addressable markets. New diagnostic tools are advancing early detection and monitoring of diseases so that patients receive more timely interventions. The majority of new drug approvals come from biotech companies (as opposed to large pharmaceutical corporations), so these developments position them at the forefront of healthcare’s future.
Attractive valuations
Biotech indices are far below their peak of 2021 and trade on attractive multiples relative to history. A near record number of small and mid-sized biotech companies trade with market caps below the value of the cash on their balance sheet. Before 2024, the sector had never underperformed the S&P 500 for more than one year – last year was the fourth year in a row. With several catalysts on the horizon, we expect the sector to rerate and return to outperformance.
Patent cliffs and the impact on M&A
Patents on drugs only last for a short time, after which the treatments "go generic" and can be copied at low cost by competitors. Over the next decade, several large pharmaceutical companies face losses of exclusivity, with “patent cliffs” totalling approximately US$500bn. However, these companies currently have approximately US$1trn of ‘dry powder’ (cash plus debt capacity) to make acquisitions, and only western biotech companies have the late-stage assets needed to fill their needs. Add in a more deal-friendly US Federal Trade Commission, and the barriers that have discouraged bigger transactions in recent times should be lowered.
This potential uptick in M&A activity creates opportunities for investors exposed to small and mid-sized biotech companies, as these are often the targets for large pharmaceutical companies. Typically, M&A in the sector happens at healthy share price premiums.
The way to play this
RTW Biotech Opportunities Ltd, which launched on the LSE in 2019, provides investors with access to this theme. The trust provides investors with long-term capital appreciation by forming, building and supporting world-class biotech companies. It guides companies through their full life cycle – from early stages to maturity – giving investors exposure to innovative public and private firms that would otherwise be difficult to access.
RTW Bio has delivered investors 74% in net asset value total return from its launch in October 2019 to 31 December 2024, far outstripping the Russell 2000 Biotech Index (+7.4%) and the Nasdaq Biotech Index (+27.6%) over the same time period.
The manager, RTW Investments, was founded in 2009 and has $6.3bn in assets under management (as at February 2025). RTW has 80 employees and partners in offices across the world. Approximately half of the investment team are MDs or PhDs, demonstrating their deep scientific expertise. Their priority is to unlock value by driving medical innovation and commercial therapies that can radically change patients’ lives and generate significant returns for the shareholders of RTW Biotech Opportunities.
Disclaimer
This information is given at the date of its publication (unless otherwise marked). No reliance may be placed for any purpose whatsoever on the information or opinions contained in this advertorial or on its completeness, accuracy or fairness. The information provided in this advertorial should not be considered a recommendation to buy, sell or hold any security. Past performance is not indicative of future results.
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