The valuations of companies in the biotechnology sector remain below their peak in 2021, but while some recovery is happening, the opportunity is no longer at the large cap area of the market, according to Ailsa Craig, who jointly runs the International Biotech investment trust.
Craig said that while the broad Nasdaq index of technology shares had recovered from the lows of 2022, the biotech component of the same index remained below the most recent peak.
She feels two things are happening within the sector which may drive investment opportunities from here.
The first is that there are a lot more biotech businesses listed on stock markets now, so there are more opportunities.
The second is that many of the larger pharmaceutical firms are faced with a “patent cliff” at the end of this decade, with the patents those companies have on some of their biggest selling drugs expiring.
Craig said that in the past, drug companies would combat patent cliffs by merging with each other, or relying on their in-house scientists to come up with new drugs in time.
But she said a recent trend had emerged where the largest companies sought to solve the issues with their product development by buying the smaller firms, particularly those with an already established pipeline of new ideas.
It is for this reason, alongside valuation issues, that she has focused the trust’s investments on small and mid-cap companies in contrast to 2021.
She said: “There was a huge boom in biotech valuations in 2021, which we felt was a bit extreme. Because of that, we went very defensive, which meant large cap. But now we are looking more at the mid and small cap area.”
One of the reasons the broad Nasdaq index has made substantial gains in 2023 is due to greater investor sentiment around the potential for artificial intelligence (AI) to impact society.
But Craig is cautious about AI’s ability to impact the life science space.
Her view is that clinical trials are “already run about as efficiently as they can be. And regulators require trials to happen on humans, so that doesn’t change anything. It could make it easier to screen out duds before they get to the human trial stage. But the impact would likely be at the margin”.
David Thorpe is Investment Editor at FTAdviser
