Geoffrey Hsu, managing partner at OrbiMed and portfolio manager of the Biotech Growth Trust, names three smaller biotechnology companies with substantial growth potential.
Biotech companies are producing new ideas at a record pace. New-medicine approvals have remained strong even as staff have left the US Food and Drug Administration (FDA). Meanwhile, major drugmakers are buying biotech firms to replace products that face patent expiry. The risk is sharp: specialist knowledge matters here more than in most sectors, and one clinical-trial result can cut a share price in half within a day. The Biotech Growth Trust offers targeted exposure by investing mainly in biotechnology.
We choose investments from the ground up, with a preference for biotechnology firms developing first-in-class or best-in-class medicines. We also lean toward small and mid-sized companies, since much of the sector's innovation now comes from them. Because our active share is high - our holdings differ substantially from the benchmark index - the portfolio can reflect our strongest ideas rather than simply mirror the market. That matters in biotech, where events can quickly change a company's prospects. Below are three holdings that show the range of our approach.
Three smaller biotechnology companies to consider
United Therapeutics (Nasdaq: UTHR) built its business mainly around treatments for pulmonary arterial hypertension - a rare form of high blood pressure in the lungs - and pulmonary hypertension linked to interstitial lung disease (PH-ILD). It remains one of biotech's most profitable companies, but its ambitions now extend into the far larger fibrosis market. Tyvaso, its lead product, produced positive late-stage results in idiopathic pulmonary fibrosis (IPF), and United Therapeutics expects a US regulatory decision in spring 2027. Approval would make it the first inhaled anti-fibrotic treatment for IPF. A legal settlement that requires a rival to leave the market also removes a competitive obstacle, giving the Tyvaso franchise room to return to growth before the IPF launch. That launch, together with renewed growth in the core business and continued strong cash generation, could mark a significant turning point.
In October, Vaxcyte (Nasdaq: PCVX) announced positive Phase III results in adults for VAX-31, its pneumococcal vaccine. The shot covers more strains than the current market leaders, Pfizer's Prevnar 20 and Merck's Capvaxive - a meaningful advantage in a market historically decided by breadth of coverage.
The next test comes in the first half of 2027, when Vaxcyte expects to report Phase II data for infants. Success there would give the company access to the paediatric market, which represents most of the opportunity. That points toward a possible leadership position in pneumococcal vaccines, a market worth more than £8 billion a year, and could make VAX-31 an appealing acquisition for a large pharmaceutical company seeking vaccine exposure.
Palvella Therapeutics (Nasdaq: PVLA) is developing a topical rapamycin gel for microcystic lymphatic malformations (mLM). Rapamycin is an established immunosuppressant, while mLM is a rare, lifelong disorder marked by ongoing leakage, bleeding, and infection. No therapy has been approved for the condition, which affects an estimated 30,000 people in the United States. If regulators approve the drug, Palvella is aiming to launch it in the first half of 2027. After positive Phase II results, the company is also beginning a Phase III trial for cutaneous venous malformations (cVM), with data expected in 2028. Palvella would be entering the market ahead of competitors, with substantial room for growth.
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