Unlocking potential: Is it time to prescribe biotech in your family office portfolio?

21 May 2024
5 minute read

Unprecedented innovation in biological tools, genetic engineering and novel therapies for treating disease are all pushing the boundaries beyond what was previously thought possible in biotech.

Innovations in the sector, driven by biotech companies, are increasing the standard of care for patients with major illnesses including cancer, autoimmune diseases and rare genetic disorders. They offer a unique investment opportunity for high-net-worth investors to support cutting-edge scientific and technological innovation as well as participate in delivering improved global health outcomes.

Family office investors need to take a long-term approach to biotech

Biotech stocks often act independently to broad share and bond market trends and can be used as a diversification tool and hedge against market volatility in family office portfolios. Investment can be high risk for high reward over long periods as company (and drug) success relies heavily on clinical trials, regulatory approvals and consumer uptake.

According to industry research, 90% of molecules that begin human clinical trials never make it to market.¹ These setbacks usually have a sustained impact on company share prices, with it not being uncommon for company’s value to fall by more than 50% in a single day on release of a bad trading update.

While many biotech companies will experience drawbacks, overall, the sector has favourable tailwinds in the longer term, and it pays for family office investors to be selective and stay the course.

An example is Avidity Biosciences, which saw share price growth of 182% in the three months to 31 March 2024, and was still climbing into May. Founded in 2012, Avidity’s lead drug candidate, AOC 1001, recently recorded positive phase 2 trials for the treatment of myotonic dystrophy type 1 – a progressive, and often fatal, neuromuscular disease, believed to affect up to 1 in every 8,000 people worldwide.² The drug is the first of a novel platform combining the stability of monoclonal antibodies with the precision of ribonucleic acid (RNA) therapeutics, offering a potential step forward in treatment for those affected by DM1 and has prompted major pharmaceutical companies Bristol-Myers Squibb and Eli Lilly to sign major licensing deals with Avidity.

In a sector as prone as biotech is to experience disparate outcomes for investors, it is crucial to discern the winners from the losers when investing. Focussing on the clinical, commercial and construction risks can help to identify companies poised to succeed by either addressing unmet medical needs or making the healthcare system more efficient.

While heading down the philanthropic or venture capital path may be noble, it can potentially restrict diversification and market access. The biotech investment team at Janus Henderson Investors has the proven research processes and capabilities to invest across geographies and sectors, as well as risk management measures to limit positions in higher-risk stocks.

Why prescribe to biotech?

Global prescription drug sales are on track to top US$1.4 trillion by 2026³, up 80% from a decade prior thanks to an increase in the number of drugs and the availability of them to help people manage illnesses.

In an ageing society, one in six people worldwide will be 65 or older by 2050. This is helping to drive biotech forward as the medical needs of the elderly are often three times that of younger generations.

There’s also a growing class of small and mid-size biotech companies, known as emerging biopharma, that are driving the bulk of today’s medical breakthroughs. These firms are responsible for nearly two thirds of molecules in the research and development (R&D) pipeline worldwide in 2021, up from less than 50% in 2016 and one third in 2001.⁴

In addition, the sector’s rapid innovation is leading to outsized revenue growth and mergers and acquisitions – for example, new weight loss products, known as GLP-1 drugs or incretins, are already annualising US$30 billion in revenue and yet they only have about 5% penetration in the US.⁵ Yet many family offices lack exposure to this growing sector due to past performance and volatility, and the more recent dominance of US-based large cap stocks.

In the final quarter of 2023 alone, nine biotech mergers and acquisitions were announced – each valued at US$1 billion or more (22 in total in 2023). It’s expected that big biopharma companies will be tempted to break out their cheque books again in 2024, especially with growing global interest in GLP-1s, gene editing, antibody drug conjugates, radiopharmaceuticals and cell therapy treatments.

A positive outlook

Parts of the biotech sector had weak valuations and market sentiment following a volatile COVID-19 period. The pandemic saw many large drug manufacturers go through a boom or bust period, depending on the success of their COVID vaccines/preventions. And after a year of working through imbalances created by COVID-19, including the waning of vaccine sales, healthcare stocks were trading at a discount to the broader market in early 2024, due to uncertainty around the US Federal Reserve’s rate cutting cycle.

Biotech’s recent rally in March and April has led to a thawing of capital markets, with a surge in private investments in public equity (PIPE), follow-on equity offerings, and venture capital funding. The set-up for biotech is open to innovation and attractive valuations could help generate stronger returns for family office investors this year.