A bright future for biotech – what to buy
Good news for shareholders in the International Biotechnology Trust: their fund has a significant holding in US cancer research business Nuvalent, for which GSK has just agreed to pay $10.6 billion– 40% more than its share price prior to the deal being announced. Even better: Nuvalent is the sixth company in the portfolio to have been acquired at a premium this year.
The deals are part of a spree of merger and acquisition (M&A) activity taking place in the global biotechnology sector – to the benefit of many investment trusts and open-ended funds specialising in this area – as part of a marked reversal in fortunes. For much of the past few years, sentiment in the sector has been downbeat – preoccupations about risk, volatility and rising interest rates have overshadowed optimism about the undoubtedly huge long-term potential of the products. More recently, however, the tide has turned. “The outlook is looking increasingly constructive,” says Jo Groves, an analyst at Kepler Trust Intelligence.
The fundamentals of investing in biotech are compelling. You’re backing companies that are developing new treatments for health problems ranging from life-threatening cancers to lifestyle-related illnesses. The demand for such treatments is huge, particularly in the context of rising and ageing populations as life expectancies increase. The United Nations estimates that the number of people in the world aged 65 or over will rise from 800 million in 2024 to two billion by 2067. No wonder biotechnology is such a high-growth industry. Precedence Research forecasts average annual growth of 4% over the next decade, which would see the market grow from $1.8 trillion today to $6.3 trillion by 2035. At the same time, biotechnology companies are finding new ways to respond to demand, developing ever more sophisticated treatments, even for the most complex diseases and conditions. For example, they’re harnessing technologies such as AI to accelerate drug discovery and to move into areas that scientists previously considered too ambitious.
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Another positive factor is the so-called “patent cliff”. Pharmaceutical companies are only entitled to exclusive rights to the drugs they own for a limited period; once this period ends, rivals can make their own versions of the drug. This adds to the demand for biotechnology companies that develop new treatments while individual companies continue to benefit from the enhanced revenues that the patents generate.
Biotech M&A generates positive returns early
All of this can add up to exciting returns for investors in biotechnology companies working on new drugs in high-value areas. And often, those returns materialise early, because a biotechnology company with a promising pipeline of treatments is an attractive takeover target for the global pharmaceutical industry. The biggest companies do blockbuster deals – Novartis alone spent $29 billion on M&A last year.
Investing in biotechnology also carries risks and potential downsides. In particular, most biotech companies are relatively small and focused on a handful of specialist projects – perhaps even a single drug candidate. Trials that start out looking highly promising can – and often do – fail later on, leaving the business without a product to sell. When investors are feeling broadly optimistic, they’re more willing to take such risks, but during less confident times their appetite for danger may be diminished. Global trade tensions and international conflict have therefore been challenging headwinds for biotech investment in recent times.
Another factor is the cost of finance – partly as biotechs often borrow to fund their early-stage work, but also because investors are effectively being offered returns that will come in the future rather than today; such returns needed to be discounted by what investors could earn elsewhere on their cash in the meantime. In this context, rises in global interest rates during 2024 and 2025 were unhelpful to biotech businesses; more recent reductions have been a positive.
Policymakers can also have an impact on the industry in other ways. Most countries attempt to regulate drug prices in some way or to restrict intellectual property rights. The US, the world’s biggest spender on pharmaceuticals, is especially important; the industry was certainly anxious about the approach Donald Trump would take in his second term of office.
Ebbs and flows in all these positive and negative factors feed the cycle of biotech businesses’ share-price performance. The sector performed poorly through most of 2024 and early 2025, but has been much stronger over the past 12 months. The Nasdaq Biotechnology index has risen by more than 51% over the last year; the MSCI World Biotechnology index is up by more than 15%.
Still, sometimes it’s also important to look past the numbers. One fascinating part of the biotechnology story is the incredible science that businesses are pursuing – and the advances they’re making for humanity. “The development I find most compelling is RAS-targeted therapy,” says Oliver Kenyon, a senior director at RTW Investments, pointing to cancerous tumours caused by mutations in the RAS family of genes. “RAS mutations drive roughly 90% of pancreatic cancers, 40% of colorectal cancers and 30% of non-small-cell lung cancers. It’s one of the most common drivers in all of oncology, and for decades it was considered ‘undruggable’ – that’s now changing fast.” We are seeing the “combination of genomics, gene editing and AI accelerate both the discovery and development of new medicines”, adds Chris Hollowood, CEO of Syncona Investment Management.
AI is helping biotech companies deliver
AI is also helping, says Hollowood. Researchers are analysing complex biological and clinical datasets and identifying promising targets in a “more efficient and robust” way. “The last decade saw the development of a huge number of new ways to make drugs; gene therapy, cell therapy, RNA, gene editing and many others. So as these new targets emerge in the next decade, developers and patients have many more ways to address them, meaning medicines will be more precise and have greater impact.”
So much is possible. “A real hope would be if something works for Alzheimer’s disease,” says Marek Poszepczynski, portfolio manager of International Biotechnology Trust. It has been especially tough to find efficacious drugs in this area, but “the industry continues with its efforts and perhaps we will see something in the next decade or so”.
And breakthroughs in mental health are possible, too. “Around a third of the 300 million people living with depression globally don’t respond adequately to existing antidepressants,” says Kenyon. “Conventional psychiatry has largely run out of answers for that population, but psychedelic-derived medicines are starting to change that.”
It’s not just about developing cures to diseases and conditions previously thought untreatable. Geoffrey Hsu, general partner of OrbiMed, points to the huge and ongoing impacts of weight-loss drugs. “Their effects are not purely cosmetic,” he says. “These medications in clinical trials have reduced the incidence of strokes, heart attacks and diabetes, and have helped alleviate symptoms of patients suffering from sleep apnoea and osteoarthritis.”
Biotechnology firms are at the heart of innovation in all these areas, says Groves, who points to data from industry analyst IQVIA showing that the number of clinical trials currently stands close to all-time highs. “The rapid development of biologic treatments and therapies is constantly expanding the [range] of products, particularly in chronic and complex diseases,” she says. “There has also been a healthy pipeline for novel drug approvals, with recent approvals for treatments for lung cancer, leukaemia, haemophilia, schizophrenia and Alzheimer’s, amongst others.”
All of this points to a potentially exciting period for the biotechnology sector – and the prospect of further gains to come. Further M&A would help – while the pace of deals has accelerated in recent months, many analysts think there is more to come. Partly, that reflects the patent-cliff issue, with pharmaceutical companies now approaching a particularly precipitous drop-off. Between now and 2030, the industry will lose exclusivity rights to drugs currently generating $230 billion of revenues a year; they won’t forfeit such money overnight, but as patents run out, rivals will be able to produce much cheaper alternatives. Other drivers of M&A include the increasing desire of many pharmaceutical businesses to diversify their holdings, acquiring biotechs with drugs that take them into new areas, and the accumulation of deal finance during a period of fewer deals. It also helps that the US government appears to be taking a more laissez-faire approach to regulation.
In this case, there is still some time to join the biotech party. At an aggregate level, valuations remain reasonable by historical standards – and while there have been good gains from many stocks, the sector’s performance has been eclipsed by, for example, the surge in the technology arena. Still, the vast majority of investors will prefer to get exposure through a collective investment fund rather than by buying individual stocks themselves. The science is just too advanced for non-specialists to make realistic assessments of the prospects of individual businesses and their key drugs.
A fund offering diversified exposure to a pool of companies chosen by a professional manager therefore provides relative comfort. Indeed, managers in the sector are often more qualified and experienced than peers investing in other industries, with relevant clinical experience of their own as well as professional investment experience. We look at some of the best options in the box below.
The best biotech stocks to buy now
A broad range of collective funds invest in the sector, but there’s a strong argument for considering a closed-ended trust over other types of fund. Biotech can be an illiquid area and prone to exaggerated shifts in sentiment that drive significant inflows and outflows of cash. A trust, where you’re buying exposure to the underlying portfolio of assets, provides some insulation from that.
The Association of Investment Companies’ healthcare and biotechnology sector offers seven investment trusts to choose from. Its top performers over the past 12 months are the Biotech Growth Trust (LSE: BIOG), with a total share price return of 103%, the RTW Biotech Opportunities Trust (LSE: RTW), up 93%, and the International Biotechnology Trust (LSE: IBT), which has returned 83%.
Alex Trett, a research analyst at Winterflood, points to the potential of two in particular to continue benefitting from M&A activity. “RTW Biotech Opportunities has seen ten M&A-related transactions in the last 12 months, all resulting in an immediate uplift to net asset value,” he says. Worldwide Healthcare Trust (LSE: WWH) is another beneficiary. “In addition to its portfolio holdings, the trust maintains a basket of M&A swaps that provide exposure to potential takeover activity across the sector.” Should the current pace of M&A activity persist, “we believe these trusts remain well-positioned to benefit. They combine extensive sector resources with teams possessing deep scientific and medical expertise, enabling them to identify innovative firms and emerging technologies, which in some cases become attractive acquisition targets.”
That’s not to say open-ended funds should automatically be excluded. If you prefer this type of vehicle, Dzmitry Lipski, head of funds research at investment platform interactive investor, picks out the Candriam Equities L Biotechnology Fund, run by Linden Thomson. The Luxembourg-domiciled fund has holdings in around 75 companies.
This article was first published in MoneyWeek’s magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
