Investments in biotechnology companies appear to have a bright future

Biotechnology businesses are emerging from a difficult time for the sector

Why is it a good time to invest in the sector now that the tide has turned?

The International Biotechnology Trust's fund has a sizable stake in the US cancer research company Nuvalent, for which GSK recently agreed to pay £10.6 billion, or 40% more than its share price before the deal was announced. This is good news for the trust's shareholders. Better yet, this year's sixth premium acquisition in the portfolio is Nuvalent.

The transactions are a part of a wave of merger and acquisition (MandA) activity that is occurring in the global biotechnology sector, benefiting numerous open-ended funds and investment trusts that specialize in this field as part of a noticeable turnaround. 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. But the tide has changed more recently. "The outlook is looking increasingly constructive," according to Kepler Trust Intelligence analyst Jo Groves.

The benefits of investing in biotech are strong. You are supporting businesses that are creating novel treatments for illnesses linked to lifestyle choices and life-threatening cancers. The need for these treatments is enormous, especially in light of the aging and growing population as life expectancy rises. According to UN estimates, there will be two billion people worldwide who are 65 or older by 2067, up from 800 million in 2024. It makes sense that the biotechnology sector is expanding so quickly. According to Precedence Research, the market is expected to grow by 4% annually on average over the next ten years, from £1.8 trillion to £6.3 trillion by 2035. Simultaneously, biotechnology companies are developing ever-more-advanced treatments, even for the most complex diseases and conditions, in order to meet consumer demand. For instance, they are using technologies like artificial intelligence (AI) to speed up drug discovery and venture into fields that were previously deemed too ambitious by scientists.

The "patent cliff" is another favorable aspect. Pharmaceutical companies are only granted exclusive rights to the drugs they own for a set amount of time; after that, competitors are free to produce their own versions of the medication. While individual businesses continue to profit from the increased income that the patents produce, this increases the demand for biotechnology firms that create novel treatments.

Early on, biotech M&A produces profitable returns.

For investors in biotechnology firms developing novel medications in high-value fields, all of this can add up to exciting returns. Because a biotechnology company with a promising pipeline of treatments is a desirable acquisition target for the global pharmaceutical industry, those returns frequently materialize early. Blockbuster deals are made by the largest corporations; Novartis alone spent £29 billion on M&A last year.

Additionally, there are risks and possible drawbacks to investing in biotechnology. Specifically, the majority of biotech firms are comparatively small and concentrate on a few specialized projects, possibly even a single drug candidate. Even very promising trials have the potential to fail in the future, which leaves the company without a product to sell. Investors are more willing to take such risks when they are feeling generally optimistic, but their appetite for risk may be lower when they are feeling less confident. Therefore, recent biotech investment has faced difficult challenges due to international conflict and trade tensions.

The cost of financing is another factor, in part because biotechs frequently take out loans to finance their early-stage research, but also because investors are essentially being offered returns that will occur in the future rather than now; these returns had to be discounted by what investors could make with their money elsewhere in the interim. In this regard, global interest rate increases in 2024 and 2025 were detrimental to biotech companies; more recent declines have been beneficial.

There are other ways that policymakers can affect the industry. The majority of nations try to limit intellectual property rights or regulate drug prices in some way. Particularly significant is the US, which spends more on pharmaceuticals than any other country in the world. The pharmaceutical industry was undoubtedly concerned about Donald Trump's strategy for his second term.

The share-price performance cycle of biotech companies is fueled by fluctuations in all these positive and negative factors. The industry did poorly for the majority of 2024 and the first part of 2025, but over the last 12 months, it has improved significantly. Over the past year, the MSCI World Biotechnology index has increased by more than 15%, and the Nasdaq Biotechnology index has increased by more than 51%.

However, there are instances when it's crucial to look beyond the numbers. The amazing science that companies are pursuing and the advancements they are making for humanity are fascinating aspects of the biotechnology story. Oliver Kenyon, a senior director at RTW Investments, states, "The development I find most compelling is RAS-targeted therapy," citing malignant tumors brought on by gene mutations in the RAS family. "RAS mutations drive roughly 90 percent of pancreatic cancers, 40 percent of colorectal cancers and 30 percent of non-small-cell lung cancers. One of the most prevalent causes in all of oncology, it was once thought to be incurable, but this is quickly changing. Chris Hollowood, CEO of Syncona Investment Management, continues, "We are witnessing the combination of genomics, gene editing and AI accelerate both the discovery and development of new medicines."

Biotech companies are benefiting from AI.

Hollowood claims that AI is also beneficial. By analyzing intricate biological and clinical datasets, researchers are finding promising targets in a "more efficient and robust" manner. "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. Therefore, as these new targets appear over the next ten years, patients and developers will have a lot more options for addressing them, which means that medications will be more effective and precise."

There are a lot of possibilities. The International Biotechnology Trust's portfolio manager, Marek Poszepczynski, states that "a real hope would be if something works for Alzheimer's disease." Although finding effective medications in this field has proven particularly difficult, "the industry continues with its efforts and perhaps we will see something in the next decade or so."

Additionally, there may be advancements in mental health. According to Kenyon, "about one-third of the 300 million people with depression worldwide don't respond adequately to existing antidepressants." "Psychedelic-derived medications are beginning to change that, but conventional psychiatry has essentially run out of solutions for that population."

It goes beyond simply creating treatments for illnesses and ailments that were previously believed to be incurable. OrbiMed's general partner Geoffrey Hsu highlights the significant and continuous effects of weight-loss medications. "Their effects are not purely cosmetic," he states. In clinical trials, these drugs have decreased the risk of diabetes, heart attacks, and strokes as well as helped patients with osteoarthritis and sleep apnea feel better."

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 range of products is constantly expanding due to the rapid development of biologic treatments and therapies, especially in chronic and complex diseases," she says. Lung cancer, leukemia, hemophilia, schizophrenia, Alzheimer's disease, and other conditions have all recently received approvals, indicating a robust pipeline for new drug approvals."

All of this points to a potentially exciting period for the biotechnology sector and the prospect of further gains to come. Even though the rate of transactions has increased recently, many analysts believe that more M&A will be beneficial. That is partly due to the patent-cliff problem, as pharmaceutical companies are currently on the verge of a particularly sharp decline. 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. The US government's apparent laissez-faire approach to regulation is also advantageous.

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. Simply put, non-specialists cannot realistically evaluate the prospects of individual companies and their main medications due to the state of the science.

Therefore, a fund that offers diversified exposure to a group of businesses selected by a qualified manager is reasonably comfortable. 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. In the box below, we examine some of the top choices.

The top biotech stocks available right 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 offers some protection against that since you are purchasing exposure to the underlying portfolio of assets.

Seven investment trusts are available in the biotechnology and healthcare sector of the Association of Investment Companies. Its top performers over the past 12 months are the Biotech Growth Trust (LSE: BIOG), with a total share price return of 103 percent, the RTW Biotech Opportunities Trust (LSE: RTW), up 93 percent, and the International Biotechnology Trust (LSE: IBT), which has returned 83 percent.

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. Another beneficiary is the Worldwide Healthcare Trust (LSE: WWH). "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.