In the five years since the World Health Organization declared Covid-19 a public health emergency, the biotechnology sector has weathered its fair share of ups and downs.
At the height of the pandemic, the sector thrived; biotech companies raced to develop vaccines for the virus in a record 10 months, whilst sales of related diagnostics, treatments and vaccines totalled tens of billions of dollars, stoking investor enthusiasm and an explosion of emerging companies in the sector.
But as the worst of the health crisis came to an end, the sector’s fortunes turned: Covid-related sales declined and rising interest rates weighed on valuations, especially for early-stage companies with undifferentiated pipelines dependent on cheap capital. Biotech entered a deep bear market that lasted from early 2021 through most of 2023.
Even today, the S&P Biotechnology Select Industry index, a broad benchmark for the sector, still trades about 45% below its 2021 peak. Enthusiasm that once lifted biotech has shifted to artificial intelligence, while the recent appointment of Robert F. Kennedy, Jr. to head the US department of health and human services has added policy uncertainty.
Despite this backdrop, the innovation that investors championed during the pandemic has continued to thrive, if not accelerate. In 2024, the US Food and Drug Administration approved 60 novel medicines, following a record 72 approvals in 2023. These included Eli Lilly’s obesity medicine, Zepbound, Madrigal’s first therapeutic for MASH, a severe form of fatty liver disease and the first new mechanism for schizophrenia in decades. With recent launches, these therapies are beginning product cycles that could drive revenue growth for the next decade. GLP-1 drugs for weight loss and diabetes, for example, are already annualising at over $50bn in sales, whilst only a small percentage of people who could potentially benefit from these drugs are currently using them.
More innovation is coming, too. In the next year, we expect data readouts on new treatments for some of the biggest unmet medical needs, such as Lp(a), a little-known form of ‘bad’ cholesterol that can increase the risk of heart attacks and strokes for an estimated 20% of the population. The GLP-1 market is also expanding into new indications, including sleep apnea and chronic kidney disease, while this year should also bring pivotal data for the first oral GLP-1s for obesity and diabetes. At the same time, exciting new platforms are advancing in antibody-drug conjugates, masked T-cell engagers, targeted protein degraders and radiopharmaceuticals.
This rate of innovation – combined with ongoing depressed valuations – has been attracting investor interest. In 2024, biotech stocks gained an average of 31% following a positive catalyst event (such as a clinical trial success), compared with an average of only 13% in 2022. Companies have also had better access to capital: in 2024, the sector had its second-largest year of equity issuance in the past decade.
Mergers and acquisitions have remained active, but larger deals have been notably absent lately. That could be changing, though. Johnson & Johnson recently announced the acquisition of neuroscience drug developer Intra-Cellular Therapies for $15bn, the biggest deal in two years. Lower interest rates and prospects for a more accommodative Federal Trade Commission under the Trump administration could also help pave the way for more sizable transactions. The pressure on large-cap biopharma to replace up to $250bn in revenues subject to patent losses through the end of the decade might be an additional driver.
We believe the sector is likely to experience continued volatility near term as markets wait for clarity on potential policy changes under the new US administration. Looking further ahead, though, we expect a strong narrative for the sector, with high levels of growth driven by innovative products addressing high, unmet medical needs.
One only needs to look at Akero Therapeutics to appreciate the opportunities for active investors: in January, the company released positive phase 2 data for lead drug efruxifermin for the treatment of liver cirrhosis in patients with metabolic dysfunction-associated steatohepatitis (MASH), evidencing a reversal of the liver disease in almost 40% of patients. With the disease affecting two million people in the US alone, the data represents a medical break-through, and drove the stock price up by 95% in just one day.
Regardless of the market environment, and the sector turbulence we have witnessed in the years since the Covid outbreak, we feel the biotech sector continues to offer active investors bountiful opportunities to add to their portfolios at attractive valuations.
Andy Acker is a portfolio manager on Janus Henderson Investors’ healthcare and biotech strategies. The views expressed above should not be taken as investment advice.