CONTRIBUTORS
Noelle Tune, MD
Analyst
Biotechnology investing has been a wild, and often frustrating, endeavor since the March 2021 highs in the midst of the COVID-19 vaccine rollout. The good news? Remarkable innovation provides abundant opportunities for investors who know the biotech space and are able to conduct deep fundamental research.
My experience as an emergency medicine physician offers perspective in my research. It’s the hat I put on when I initially screen for investments. In my equity analysis, I focus on which diseases need better treatments, and which businesses are best equipped to provide them. I look for companies with the most innovative approaches, the most intriguing pipelines, and a commitment to solving a problem that currently has no solution.
Signs point to improvement for the sector in 2025
Over the past 5 years, the biotechnology sector has significantly underperformed the broader market and, in particular, technology stocks. The most recent lackluster returns can be tied to headwinds such as persistently high interest rates and concerns over health-care policy changes with the Trump administration. Another headwind is the more longstanding need for consolidation following the rash of biotech IPOs during the COVID-19 pandemic. Despite the uncertainty, biotech continues to offer exciting possibilities—for investors as well as for individuals in need of innovative treatments. The sector has the potential to right itself in 2025, particularly if we see an acceleration of merger-and-acquisition activity, a stable regulatory environment, and gradually easing interest rates. Importantly, we see a lot of fundamentally compelling stocks at attractive valuations after the recent drawdown.
Uptick in M&A activity is worth watching
On the M&A front, year to date, we have already seen a proposed M&A deal—Johnson & Johnson’s proposed purchase of Intra-Cellular Therapies in early January. This one deal is larger than the top 4 deals in 2024 combined, renewing hope that 2025 will see a more active deal calendar.
More deal flow is needed to re-invigorate biotech, however. Despite consolidation over the past few years, there are still too many small, under-capitalized companies, many of which came public during the pandemic-influenced years of 2020 and 2021. A return to 2023 M&A volumes in 2025 would go a long way to boosting generalist interest in the sector.
Pandemic era brought a rise in biotech IPO volumes
Source: Data from CapitalIQ and Stifel database as of 12/2024.
Keeping an eye on political and headline risks
Concerns exist around several nominees for health-care leadership posts. Most notable, especially for vaccine players, is the appointment of Robert F. Kennedy Jr. for Health and Human Services secretary. However, the nominee for FDA commissioner, Dr. Marty Makary, a physician/scientist, appears to be viewed positively by industry personnel. This could bode well for stability of FDA staffing and continued improvements in the pace of drug approvals following labor-related constraints during the pandemic. While risks remain around FDA uncertainties, I am hopeful that we will look back on 2025 and note that FDA operated in a business-as-usual, if not slightly improved, fashion.
Persistent demand boosts opportunities for biotech investors
I’ll paraphrase a colleague, who said recently that biotech may not always be profitable, but at least it’s interesting. Our goal is to make it interesting and profitable. We look for strong ideas in companies that are relatively de-risked and innovative. While we stay cognizant of macroeconomic headwinds, we don’t let them interfere with our focus on fundamentals. We believe there are many reasons to be excited about investing in biotech in the coming years.
For my thoughts on the most compelling areas of biotech, read Unmet needs over ‘me too’ drugs
Endnotes
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
Investments in fast-growing industries like the health care sector could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement or regulatory approval for new drugs and medical instruments.
Active management does not ensure gains or protect against market declines.
IMPORTANT LEGAL INFORMATION
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.
Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton ("FT") has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Please visit www.franklinresources.com to be directed to your local Franklin Templeton website.