The sector recovery that is just getting started and what to watch

There are many waiting with bated breath for the rate-cutting cycle to hit its stride and the biotech sector is no exception.

Janus Henderson’s Andy Acker notes the biotech sector has delivered “gains seven out of eight times in the six months after the Fed’s first rate drop.”

There’s little to suggest it can’t happen again. Acker notes that, even in a bear market, innovation in biotechnology has been accelerating.

While most recent media attention has focused on obesity treatments, Acker is most excited about what he refers to as the “precision-guided missiles” of the medical world—antibody-drug conjugates—a potential game-changer for cancer treatment.

He is also closely watching innovations in inflammation and immunology, where he points out the success of trials is mirroring the advances in the more popular topics of obesity, cancer and Alzheimer’s Disease.

In this Rapid Fire for the Biotech mini-series, Acker shares why the recovery is “just getting going”, including what signs the IPO market and M&A activity offer, along with the stocks he is watching.

Are we heading into a biotechnology boom? What signals are you watching and is now a good time to invest?

Biotech is emerging from one of its worst bear markets on record, which has weighed heavily on valuations in the sector. At the same time, innovation is accelerating, with rapid advances taking place in large end markets such as obesity and diabetes and in new drug modalities, including antibody drug conjugates and cell therapies.

This combination is helping catalyse a sector recovery that we think is just getting going — and that could accelerate once the Federal Reserve (Fed) begins cutting rates.

According to industry analysis, since 1995, the biotech sector has typically outperformed during rate-cutting cycles, delivering gains seven out of eight times in the six months after the Fed’s first rate drop. And over the following 12 months, the sector has outperformed the S&P 500 Index by an average of 16%.

What are the biggest drivers of growth for the sector going forward?

We see the sector’s rapid pace of innovation as one of the biggest drivers of growth going forward. In 2023, the Food and Drug Administration (FDA) approved a record 73 novel medicines, and in the first half of 2024, more than two dozen new drugs were approved. These therapies — many of which target high, unmet medical needs and dramatically improve the standard of care for patients — are now beginning revenue cycles that could last 10 years or longer.

Aging populations are another driver. 

By 2050, one in six people worldwide will be 65 or older. This age cohort typically spends three times as much on medical services than younger generations, which suggests demand for healthcare could rise rapidly over the coming decades.

What trends are you seeing in IPOs?

While IPOs have yet to return to normal levels of activity, signs of life are emerging, with more companies going public so far in 2024 than last year. Even more encouraging is the market for secondary equity offerings (the issuance of additional shares by a public company), where activity has recently rocketed. 

In fact, the first half of 2024 was one of the busiest periods on record, with more than US$26 billion in secondary equity raised, well above the US$10.3 billion raised during the same six months the year prior (and up from US$20.7 billion in the first half of 2020, a boom year for the biotech sector). We believe this loosening of capital markets signals growing investor enthusiasm for the sector.

M&A activity ramped up in late 2023, but was slower in early 2024. Do you expect a ramp-up in activity towards the end of 2024?

The slowdown in M&A during the first half of 2024 may be only temporary, as companies await the US election and potential impacts on regulatory policy. Even so, of the deals announced this year, many have been done at significant premiums (as high as 150%) or have been concentrated in the private sector, benefiting crossover investors like us. 

In addition, several blockbuster drugs (annual sales of US$1 billion or more) are set to lose patent protection over the coming years. 

As such, big pharma remains incentivized to make deals and has ample dry powder to do so, with roughly $180 billion in total cash and cash equivalents to fund M&A and strategic collaborations.

Which sub-sectors of healthcare do you favour in your portfolio at the moment?

We favour small- and mid-cap biotechs with newly launching products or exciting late-stage pipelines, many of which still trade at a discount following biotech’s three-year pullback. 

We also continue to find opportunities in areas of unmet medical need where new mechanisms are showing promising efficacy. These include incretin therapies for diabetes and obesity, antibody drug conjugates, radiopharmaceuticals, and cell therapies for cancer and autoimmune diseases. We believe these medicines are transforming the standard of care for patients and could have substantial growth potential.

What emerging opportunities are you seeing that the average investor may not be aware of?

Cancer, obesity, and Alzheimer’s often grab the spotlight given their sizable patient populations and significant medical advances. But inflammation and immunology (I&I) is another field that is also seeing similar success. I&I encompasses a wide range of diseases, including rheumatoid arthritis, psoriasis, and Crohn’s disease, and today, the therapeutic area has several tailwinds. 

These include favourable use trends (many patients stay on medicines for long periods), a growing end market (one in 10 individuals suffers from an immune disorder today), and new mechanisms of actions that are improving efficacy and reducing side effects. As such, in 2023, several multibillion-dollar M&A deals targeting I&I were announced, while sales of I&I drugs are forecast to hit US$192 billion globally by 2028.

What newer innovations excite you the most and why?

We continue to be excited about a new class of targeted therapies called antibody drug conjugates (ADCs), which could revolutionize the way we treat oncology. 

One can think of ADCs as precision-guided missiles: These drugs bring chemotherapy directly to cancer cells, while sparing healthy tissue. 

Results have been promising. In ovarian cancer, for example, a drug called Elahere delivered a 33% reduction in mortality risk for patients compared to chemotherapy — the first time an overall survival benefit had been achieved in chemo-resistant ovarian cancer.

What three stocks are you watching?

One stock we are watching is Insmed (NASDAQ: INSM). 

The biotech recently reported positive phase-3 results for its drug candidate for bronchiectasis, a lung disease affecting over one million individuals globally. With no approved treatments for the condition, we believe Insmed’s drug could have multibillion-dollar potential. 

Sarepta Therapeutics (NASDAQ: SRPT) is another. 

The company has a novel gene therapy for Duchenne muscular dystrophy, a severe hereditary disease that leads to rapid muscle weakness in children. The drug, Elevidys, was first approved by the FDA in late 2023 for a limited patient population but received broader approval in June of this year. Given the high unmet need and the expanded label, we think Elevidys should see rapidly accelerating sales in the coming months. 

We also continue to like Eli Lilly (NASDAQ: LLY). 

We think the company has strong earnings growth potential thanks to its highly efficacious GLP-1 injections for diabetes and weight loss and other GLP-1s in development. In addition, Verzenio, a treatment for patients with high-risk breast cancer, approved in 2021, is already annualizing more than $3 billion in sales, and a therapy for Alzheimer's disease received FDA approval in July of this year.

Have you seen the other expert interviews in our biotech mini-series?

Hear from HB Biotechnology's Charlie Williams: 

Equities

The small and mid-cap biotechs poised for a big breakout

View