The stark contrast between the excitement surrounding everything AI and the depressed state of the biotechnology sector tells a lot about the current polarisation of investor sentiment.

Putting the numbers into context, the total value of the biotechnology industry is a mere ‘drop in the ocean’ $1.5 trillion compared with the $16 billion to $18 trillion market capitalisation of the Magnificent Seven.

The Nasdaq Biotechnology index has gone nowhere over the last five years, losing 2% of its value, and sits 18% below its 2021 peak, while the S&P 500 has almost doubled and trades at all-time highs.

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Listed UK biotechnology companies trade at an average 14% discount to NAV (net asset value) according to the AIC (Association of Investment Companies) despite three of the seven listed vehicles delivering gains in NAV over the last five years.

The only trust to register a gain in share price total return over the last five years is Polar Capital Healthcare (PCGH), notching up an annualised 6% return.

One standout victim of the malaise in the sector which we discuss in more detail later, is specialist developer of UK intellectual property assets Syncona (SYNC) which trades at a whopping 44% discount to NAV.

WHAT'S HAPPENING AT SYNCONA?

Syncona (SYNC) is unique in the biotechnology sector in that it aims to create, build and scale world class companies around exceptional UK scientific research.

At the full-year results on 19 June the company announced it is considering a three-year wind down of its circa £1.1 billion portfolio to provide accelerated liquidity to shareholders looking for an exit, while creating a private continuation vehicle for investors wanting to stay.

Peel Hunt analyst Miles Dixon believes the board should consider letting the portfolio run while seeking liquidity for shareholders. He reasonably asks if selling at the bottom of a bear market is the wisest decision for shareholders in the long run.

Dixon argues his alternative solution would give Syncona the time it needs to deliver on its original strategy of achieving £5 billion of NAV by 2032, while also allowing shareholder exits more efficiently.

He estimates around 93.5% of the value in Syncona’s life sciences portfolio consists of investments held at cash (invested), quoted /mark-to-market, or tested with third party specialist money raises.

In other words, Syncona’s NAV is very real, so why wouldn’t investors want to hold out for NAV, or indeed, a premium, asks Dixon. Historically Syncona has traded at a premium of between 30% to 40% to NAV.

If more evidence were needed, fund managers Ailsa Craig and Marek Poszepczynski at International Biotechnology (IBT) point out that nearly half of US-listed biotech companies with a market capitalisation under $1 billion were trading below the value of their cash in early April.

The managers do not claim to be able to time the markets, but they conclude: ‘When we look at what’s happening in the sector today – the indiscriminate selling, the dramatic divergence between sentiment and fundamentals – we believe this could represent a rare and powerful opportunity.’

Craig and Poszepczynski said they are ‘increasingly excited by the progress in rare genetic disease treatments, where scientific and biological understanding of the fundamentals of the diseases allows for personalized treatments.’

‘Advanced modalities such as gene therapies and RNA-based treatments are at the forefront, offering the potential to treat previously untreatable diseases, added the managers.

Fund manager James Douglas at Polar Capital Global Healthcare believes the sector has reached ‘peak fear’ with sentiment ‘on its knees.’ Douglas says previous periods of significant underperformance were followed by a bull market in healthcare stocks.

‘Today we see another attractive entry point into a sector that we feel is strongly dislocated from its fundamentals,’ added Douglas.

A FUNDAMENTAL DISCONNECT

All this suggests a fundamental disconnect and misunderstanding of the significant impact biotechnology innovation could have on humankind over the next few years, and the scale of shareholder value it could create.

Ultimately, the potential market value of the companies developing cures for major diseases such as cancers, cardiovascular disease and neurodegenerative disorders could rival the value of today’s AI ‘picks and shovels’ companies.

The one area within biotechnology which has generated significant excitement in recent years is the revolution in the treatment of obesity, brought about by the development of GLP-1s (Glucagon-like peptide-1 receptor agonists) which mimic the body’s natural appetite and blood sugar hormone.

Woody Stileman, managing director, business development at RTW Biotechnology Opportunities (RTW) told Shares: ‘Obesity is one of the most urgent global health challenges, affecting over one billion people and driving trillions in healthcare costs.

‘In the UK, obesity costs the NHS £6.5 billion annually and is the second biggest preventable cause of cancer, so the potential impact of reducing the incidence of obesity is enormous.’

The second wave of development will see next generation drugs on the market as early as 2026.

‘What makes next-generation treatments so exciting is their ability to target the biological roots of obesity with unprecedented efficacy, delivering weight loss and improving outcomes across diabetes, cardiovascular disease, and more,’ explains Stileman.

With peak sales forecasts reaching as high as $150 billion, next-generation obesity treatments represent an unprecedented scientific breakthrough - and for investors, a significant investment opportunity.

RTW has two irons in the fire in the next generation weight-loss space, through portfolio companies Corxel and Kailera. The former is developing an improved efficacy obesity drug and the latter an oral solution, which would be the first of its kind.

Psychedelics are another area of the biotech market seeing a lot of change and are no longer considered ‘fringe’ science in psychiatry among practitioners and regulators. These drugs, derived from plants or synthetically manufactured, alter a person’s perception of reality.

‘As Stileman explains: ‘Medicine is entering a new era in psychiatric care, with the potential to transform treatment for conditions like depression and PTSD.’ 

SPEEDING UP DRUG DISCOVERY

Drug discovery has historically been like trying to find a needle in a haystack, as well as costing billions of dollars in research and development spending.

That equation is changing fast. For example, Google-backed Isomorphic Labs has built an AI system which predicted the structure of virtually all the 200 million proteins ever identified.

That is something which would have otherwise taken a billion years of research time according to Demis Hassabis, CEO of Google DeepMind, which spun-out Isomorphic Labs.

At the 2025 World Economic Forum in Davos, Hassabis told the audience the company planned to have drugs in clinical trials by the end of the year. Isomorphic Labs is focused on oncology (cancer), cardiovascular, and neurodegenerative diseases.

In 2024 Hassabis and DeepMind senior research scientist John Jumper shared the Nobel Prize for Chemistry for their work on AlphaFold, an AI system which can predict protein structures. The next goal is to reduce the time taken from a target to a candidate protein to a matter of months or weeks.

‘Eventually you could imagine personalised medicine where it’s optimised maybe overnight by an AI system for your personal metabolism to be perfect for you,’ explained Hassabis.

In March, Isomorphic Labs raised $600 million in its first ever external funding, with Alphabet (GOOG:NASDAQ) supported Google Ventures also participating in the fund raise.

‘This funding will further turbocharge the development of our next-generation AI drug design engine, help us advance our own programmes into clinical development, and is a significant step forward towards our mission of one day solving all disease with the help of AI,’ said Hassabis.

Hassabis is one of a growing number of scientists who believe AI could have an even greater impact on society than the internet or mobile telephony, comparing it to an ‘electricity or fire kind of impact.’

In 2024, Isomorphic secured high-profile collaborations with Eli Lilly (LLY:NYSE) and Swiss-based Novartis (NOVN:SWX), snaffling $1.7 billion and $1.2 billion of funding, respectively.

In June, leading diabetes and weight loss drug specialist Novo Nordisk (NOVO-B:CPH) became the first customer of Danish AI supercomputer Gefion with the goal of transforming drug discovery and driving healthcare innovation. Gefion is Denmark’s first AI supercomputer and is powered by 1,528 Nvidia (NVDA:NASDAQ) state of the art H100 Tensor Core GPUs (Graphics processing units).

QUANTUM LEAP

Another exciting emerging technology in biotechnology is applying quantum computing to solving problems faster. Quantum computing harnesses the unique qualities of quantum mechanics to solve problems beyond the reach of classical computers.

It is estimated to become a $1.3 trillion industry by 2035 according to McKinsey Digital. In 2024, Novo Holdings, the controlling shareholder of Novo Nordisk, pledged $200 million to establish a quantum computing hub in Denmark.

Soren Moller, managing director for seed capital investments, said: ‘Combining Novo Holdings’ longstanding experience in developing the life sciences ecosystem in the Nordics with the quantum activities and commitment from the Novo Nordisk Foundation provides a very powerful platform for building quantum startups.

‘Our ultimate goal is to create, grow and develop strong quantum technology companies in the Nordics.’

WAYS TO GET BIOTECH EXPOSURE

Given the specialist knowledge required to invest in the sector, and the high risks associated with developing new drugs, a diversified active fund or specialist index tracker is suitable for most investors.

The £383 million iShares Nasdaq US Biotechnology ETF (BTEK) aims to track the NBI (Nasdaq Biotechnology Index) at a cost of 0.35% per year. The fund has 261 holdings and gives investors access to some of the world’s biggest biotechnology and healthcare companies.

Top holdings include Gilead Sciences (GILD:NASDAQ), Vertex Pharmaceuticals (VRTX:NASDAQ) and AstraZeneca (AZN).

With all the listed actively managed trusts trading at discounts to NAV, there is value to be found across the sector.

Bellevue Healthcare (BBH) and International Biotechnology (trading on a 2% and 11% discount) also pay a dividend and sit on trailing yields of  4.7% and 4.9%, respectively.

The latter is a running Shares Great Idea and despite all the recent market turmoil is only around 9% underwater since we pitched the idea in November 2024. 

We like the fund’s ‘all weather’ appeal and its ability to outperform in both up and down periods for the sector. This reflects the team’s flexible value-driven approach and ability to adapt to evolving market conditions with a focus on capital preservation and selective risk-taking.

Commenting on two of the fund’s most exciting holdings, the managers told Shares: ‘Avidity Biosciences stands out in the neuromuscular disease space.

‘Its drug delivery platform – combining monoclonal antibodies with oligonucleotides – enables precise delivery of RNA therapeutics to muscle tissue, with late-stage programmes that suggest multi-billion dollar markets.

‘Similarly, Uniqure’s gene therapy for Huntington’s Disease, a devastating and fatal hereditary condition with no current treatments, uses viral vectors to deliver silencing RNA, aiming to suppress the toxic Huntington gene expression. Early clinical data have been encouraging in stabilising disease progression.

‘Overall, innovation in rare disease therapeutics – especially those using gene and RNA technologies – remains one of the most promising areas in biotechnology today.’

In 2023, we pitched RTW Biotech Opportunities as a Great Idea and the shares are sitting around the same level ($1.30) today, although the discount has widened out to 25%.

Since launching in 2019, the company’s NAV per share has delivered an annualised return of 8.8% per year, outperforming the Russell 2000 Biotech Index (2.6%), the NBI (3.9%) as well as the AIC Biotechnology and Healthcare sector’s annualised return of 1.5%.

RTW is a full life cycle investor which means it can invest in different stages of a company’s development and has the flexibility to focus on the most attractive parts of the market.

Roughly two thirds of the portfolio is invested in public markets and just under a third in private companies. By therapy the portfolio is most exposed to rare diseases, cardiovascular, metabolic and oncology.

The managers recently noted M&A (merger and acquisition) activity has started to pick up, with total deal value to the end of June roughly similar to that for the whole for 2024.

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