Innovation continues to fuel growth for the biotech sector, which is set to benefit from ageing global populations, increasing healthcare spending and medical advancements, which could drive long-term returns.
From the rapidly expanding obesity sector – projected to grow from $3.2bn in 2023 to $11.3bn by 2028 – to undervalued opportunities in the central nervous system (CNS) and oncology markets, there are many compelling investment opportunities on offer for those seeking to diversify beyond big tech into a sector offering both resilience and strong growth potential.
Obesity drugs: a growing market
Obesity has long been a significant global health challenge. While early drugs often had limited effectiveness and significant side effects, a new class of drugs – GLP-1 receptor agonists – has revolutionised the space in recent years, showing considerable success in the fight against obesity.
While Eli Lilly and Novo Nordisk are currently the two main players, competition in the space is intensifying. Escalating demand for solutions has prompted biotech and pharma companies to invest billions into developing next-generation obesity drugs, with 79 clinical-stage programmes currently in progress, including industry giants such as Amgen, Pfizer and Roche, and numbers expected to keep growing.
However, not all companies are positioned for success. Some firms offer little more than compelling narratives rather than clinical data, only seeking to piggyback on current investor interest and boost valuations.
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Eli Lilly and Novo Nordisk’s ability to maintain their dominant positions in the market will depend on whether any competitors can develop better, safer or more convenient treatments. It will be no mean feat for a new entrant to crack the market but, ultimately, it is likely at least one biotech company could develop an improved drug and partner with a big pharma company that has the necessary capital to build manufacturing capabilities. This makes assessing the true value of the incumbent players difficult, as their value will be affected by the success of new entrants to the market.
Ultimately, the obesity drug market is poised for continued growth, driven by rising obesity rates and growing demand for effective treatments, with insurers and single payers increasingly likely to foot the bill. Many companies outside the big names are also set to benefit from this expansion.
Active versus passive in biotech
While obesity drugs have captured both headlines and investor attention alike, the healthcare and biotech sectors are vast, with many undervalued opportunities beyond obesity treatments also offering compelling investment opportunities. Despite the potential for significant returns, navigating the healthcare and biotech sectors can be complex and requires sector-specific expertise.
For investors considering exposure to this space, it is important to consider whether to take an active or passive approach. In such a specialist sector, active management can be key to unlocking value, with the expert knowledge of experienced managers able to make a meaningful difference to long-term returns.
Passive investing – through index trackers or ETFs – provides indiscriminate exposure to everything within the index or basket being replicated. This means exposure to the high-quality stocks, the low-quality stocks and everything in between. It also means exposure to a huge disparity in value, which is particularly common in the biotech sector.
Active managers are well-placed to understand and identify the underlying potential in companies and reduce portfolio volatility – from macroeconomic events to clinical trials – that an indiscriminate passive approach would experience.
Navigating Trump 2.0
Many investors have questioned whether the new Trump administration will have an impact on the healthcare space. While political uncertainty may cause some short-term volatility for the sector, it is fundamentally well-positioned to benefit in a business-friendly political environment and navigate any potential challenges and thrive in the years ahead.
Innovative drugs that play a role in keeping patients out of hospital are unlikely to be the target of Government intervention, as it is hospitals, not drugs, that account for the largest share of US healthcare spending.
Furthermore, biotech’s long-term success is underpinned by its role in public health and scientific advancement. Governments rely on biotech innovation to address pressing healthcare challenges, while the industry benefits from supportive regulatory frameworks and funding.
Investors that fund biotech’s drug development efforts benefit from the potential for attractive returns on investment, and once the patents expire, these drugs are made available to society for pennies in the pound in perpetuity.
Overall, the industry’s long-term fundamental drivers remain incredibly strong, with the biotech sector positioned to thrive and offer compelling opportunities to investors.
Ailsa Craig and Marek Poszepczynski are portfolio managers at the International Biotechnology Trust
