What to expect from biotech in 2024

Global financial markets continued to be buffeted by a range of macroeconomic and geopolitical factors in 2023. After the bruising experience of interest rate hikes in 2022, investors saw some relief thanks to a steady decline in the rate of inflation, which provided broad support for both equity and bond markets, particularly towards the end of the year.

Within equity markets, the biotechnology sector experienced a year of further consolidation. Many companies underwent restructuring, merging or being acquired, presenting opportunities for active investors such as International Biotechnology Trust (IBT) to add value. Despite these developments, the sector faced another challenging year, with only a rally in the last few weeks of the year saving the Nasdaq Biotechnology Index (NBI) from ending in negative territory for the third consecutive year.

Looking ahead

There are several key themes and events that investors should monitor closely in the year ahead. Geopolitical tensions in Eastern Europe, the Middle East, and between China and Taiwan have the potential to continue to influence investor sentiment profoundly, both positively and negatively. Meanwhile, with many investors now anticipating interest rate cuts in 2024, much of the focus will inevitably be on the “Fed Pivot”. This could bring further cheer to equity markets should the Federal Reserve act on its evolving rhetoric and reduce US interest rates this year. Many commentators now expect rates to be 1% lower by the end of 2024, with a further 1% cut expected in 2025. If the Fed fails to follow through with this looser monetary policy, markets are unlikely to be pleased.

Ultimately, decisions on monetary policy from the Fed should be primarily driven by economic data. Already in 2024, markets have reacted negatively to a better-than-expected employment report, and further data releases will no doubt continue to shape the debate on interest rates and, indeed, broader investor sentiment. Nevertheless, with the US election looming later this year, there may also be a political influence on monetary policy, and the concept of central bank independence could be called into question.

Biotechnology in 2024

The biotechnology sector is not completely immune to the slings and arrows of broader investor sentiment, but there are some sector-specific reasons for optimism. Despite the recent rally, the Nasdaq Biotechnology Index remains almost 20% below the peak it reached in 2021¹. This suggests significant upside potential for the index as a whole as we move through 2024 and beyond. This potential is underpinned by the sector’s accelerated pace of innovation, and heightened competitiveness and efficiency, following three years of consolidation and restructuring.

As the chart below demonstrates, the number of new drug approvals is currently high and on an upward trend. Importantly, many of these new therapies are for medical conditions that have previously been considered untreatable. This reflects the accelerating pace of innovation in biotechnology and other scientific fields, and hints at the scale of the opportunity that lies ahead for investors in the sector.

Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.  Exchange rate changes may cause the value of any overseas investments to rise or fall.

Meanwhile, the prospect of further merger & acquisition (M&A) activity looks strong. Patent expiries among the larger pharma players continues to be a pressing issue and they will continue to look towards the biotech sector for opportunities to plug the holes in their product shelves and pipelines. The continued implementation of the Inflation Reduction Act (IRA) could amplify this demand for the more innovative biotech businesses with promising pipelines, as we explained here in a previous blog. Moreover, if interest rates decline, companies will find it easier to finance deals and product development. In turn, this could lead to a return of initial public offerings (IPOs), signalling an improved sentiment towards the sector.

Product launches to watch

In the healthcare sector, two notable launches are expected to unfold in 2024. The first of these is in the field of obesity treatment through GLP-1 drugs, which was discussed in our November blog here. Novo Nordisk had the headstart on the market with Wegovy, but newly approved Zepbound from Eli Lilly is expected to gain ground in 2024. Market expectations here are extremely high with sustained demand anticipated. However, investors should be mindful of the risks posed by continued supply constraint problems and uncertainty lingers over who should ultimately bear the cost of these treatments, so investors should continue to watch how reimbursement policies develop.

The second major launch to watch is in the area of Alzheimer's disease. 2024 will mark the first full year on market for Biogen and Eisai’s Leqembi, which became the first Alzheimer’s treatment to be approved by the FDA -in twenty years, in July 2023. In contrast to the obesity market, expectations here are relatively muted, despite the potential in this area of high unmet medical need. The success of the launch of Leqembi will likely be influenced by factors such as market acceptance, patient safety and efficacy.

Within the IBT portfolio, we will also be closely watching the continued launch of Supernus’s ADHD non-stimulant drug Qelbree, and Krystal Biotech´s innovative gene-therapy cream, Vyjuvek, for the debilitating dystrophic epidermolysis bullosa, a severe skin condition.

Clinical data to watch

In terms of important clinical data for 2024, a big clinical data point to watch is from Alnylam Pharmaceuticals, regarding its TTR (transthyretin) franchise. TTR is a protein that transports certain hormones around the human body. Mutations in the TTR gene can lead to the protein ‘misfolding’ which can cause the build-up of potentially dangerous amyloid deposits in various parts of the body including the heart, nerves and gastro-intestinal tract. The entire sector is eagerly awaiting the results of Alnylam’s Helios B Phase 3 study, which could have a major impact on the treatment of a range of diseases associated with TTR, including the rare, progressively debilitating and fatal disease ATTR Amyloidosis.

Elsewhere in the IBT portfolio, notable clinical data came out in late January for Vera Therapeutics’ Atacicept in IgA Nephropathy (IgAN), a serious and progressive autoimmune disease of the kidney that often leads to dialysis. Following the promising Phase 2b data, Vera, a top ten portfolio holding for IBT, has seen its share price double. 

The January 2024 readout from Vertex Pharmaceuticals, which is developing non-addictive treatments for acute and chronic pain was one that the market was watching closely. The success of this project, especially in respect of chronic pain, could have significant implications for patients and for the broader pharmaceutical industry. It is estimated that 60 million people struggle with the addictive effects of opioids globally, and more than 100,000 people die every year from opioid overdose². However, while Vertex’s drug was deemed non-addictive and safe, its efficacy in acute pain was not significantly better than other products on the market so this has not turned out to be the sector catalysts many were hoping for. The potential for Vertex to address chronic pain remains a hopeful prospect, although the eagerly anticipated outcome from the chronic pain studies is not expected in 2024.

We are also keenly following the continued clinical trial readouts for Intra Cellular’s Caplyta and Argenx’s Vyvgart. Both of these represent ‘pipeline in a product’ opportunities that are now being developed for multiple different health indications, which significantly increases their future economic potential.

Conclusion

In summary, there are sound reasons to expect a more positive performance from the biotechnology sector as a whole in 2024 and beyond. Valuations look reasonable, innovation continues at pace and consolidation has, in general, improved the quality of offerings in the sector. As ever, we believe it remains crucial to adopt a selective strategy when approaching the biotech sector. In doing so, we believe the opportunity for active investors to add long-term value is significant. We continue to find, and invest in, fairly valued biotechnology businesses with outstanding technology, excellent future earnings potential and the ability to transform patient lives.

[1] - Source: Bloomberg to 5 February 2023 in US dollars. Past performance is not a guide to future performance and may not be repeated.

[2] - Source: The Lancet, July 2023

_________________________________________

International Biotechnology Trust plc Risk Considerations

Capital risk / distribution policy: As the Company intends to pay dividends regardless of its performance, a dividend may represent a return of part of the amount you invested.

Concentration risk: The Company's investments may be concentrated in a limited number of geographical regions, industry sectors, markets and/or individual positions. This may result in large changes in the value of the Company, both up or down.

Currency risk: The Company may lose value as a result of movements in foreign exchange rates, otherwise known as currency rates.

Gearing risk: The Company may borrow money to make further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase by more than the cost of borrowing, or reduce returns if they fail to do so. In falling markets, the whole of the value in that such investments could be lost, which would result in losses to the Company.

IBOR risk: The transition of the financial markets away from the use of interbank offered rates (IBORs) to alternative reference interest rates may impact the valuation of certain holdings and disrupt liquidity in certain instruments. This may impact the investment performance of the Company.

Liquidity risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. In difficult market conditions, investors may not be able to find a buyer for their shares or may not get back the amount that they originally invested. Certain investments of the Company, in particular the unquoted investments, may be less liquid and more difficult to value. In difficult market conditions, the Company may not be able to sell an investment for full value or at all and this could affect performance of the Company.

Market risk: The value of investments can go up and down and an investor may not get back the amount initially invested.

Operational risk: Operational processes, including those related to the safekeeping of assets, may fail. This may result in losses to the Company.

Performance risk: Investment objectives express an intended result but there is no guarantee that such a result will be achieved. Depending on market conditions and the macro economic environment, investment objectives may become more difficult to achieve.

Share price risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. This means the price may be volatile, meaning the price may go up and down to a greater extent in response to changes in demand.

Smaller companies risk: Smaller companies generally carry greater liquidity risk than larger companies, meaning they are harder to buy and sell, and they may also fluctuate in value to a greater extent.

Valuation risk: The valuation of some investments held by the Company may be performed on a less frequent basis than the valuation of the Company itself. In addition, it may be difficult to find appropriate pricing references for these investments. This difficulty may have an impact on the valuation of the Company and could lead to more volatility in the share price of the Company, meaning the price may go up and down to a greater extent.

Additional disclaimers

For help in understanding any terms used, please visit address https://www.schroders.com/en-gb/uk/individual/glossary/.

We recommend you seek financial advice from an Independent Adviser before making an investment decision. If you don't already have an Adviser, you can find one at www.unbiased.co.uk or www.vouchedfor.co.uk Before investing, please refer to the prospectus, the latest Key Information Document (KID) and Key Features Document (KFD) at www.schroders.co.uk/investor or on request.