Several powerful headwinds - including surging inflation, rising interest rates, and the outbreak of war in Europe - contributed to heightened volatility across global markets in 2022, and the biotech space was not immune.
While uncertainty and turbulence will likely persist this year, as global markets adapt to a new regime of elevated rates and slowing growth, the coming months offer cause for optimism around biotech.
UK retail sales unexpectedly rise in January
Abounding scientific innovation continues to fuel the supply of new drugs for the sector, and 2022 bore witness to a record number of drugs reaching the clinical trial phase - many with the potential to radically transform the way we tackle diseases.
Meanwhile, the developing world's growing healthcare requirements and an ageing global population underpin resilient demand for products.
Important advances
One ailment we may witness considerable progress in combatting over the coming months is Alzheimer's disease, a devastating brain disorder that gradually destroys memory and thinking faculties.
The disease - which makes up the majority of dementia cases - has historically been difficult for scientists to understand, and progress on treating it has been slow. In fact, no new products had been approved to treat Alzheimer's in more than 15 years - until recently.
The recent news US biotech firm Biogen's Alzheimer's treatment Lecanemab is proving effective in reducing the cognitive and functional decline of patients with mild Alzheimer's symptoms represented a major development for the space.
The US Food and Drug Administration has granted approval for Lecanemab, and we hope this will result in an influx of similar treatments receiving approval over the coming months.
Looking beyond Alzheimer's, there is also considerable excitement around new treatment modalities coming to market, such as gene, cell and RNA therapies.
These have the potential to radically transform healthcare across a variety of diseases where there remains significant unmet need.
For example, there has been substantial innovation within the cell therapy arena over recent months.
This refers to the administration of cells into a patient's body to grow, replace, or repair damaged tissue for the treatment of a disease.
Over the coming year, we will closely be following various clinical readouts and new drug launches, for example Uniqure's launch of its gene therapy indicated to treat Haemophilia B patients.
Timing will be key
As biotech innovation motors on, there is plenty to be excited about on the horizon - not only for the countless patients globally who stand to benefit from the output.
The space also presents a fertile hunting ground for astute investors, who can propel lifechanging innovation while generating attractive returns in the process.
However, the biotech space is highly sentiment driven, and investors must understand its distinctive cyclical nature to have the best chance of capitalising on it.
Biotech investment typically follows five stages.
Stage one is distinguished by depressed valuations that poorly reflect the underlying potential of companies.
'Very strong link' between ESG performance and employees investing in share plans
This results in bearishness and a low number of initial public offerings, with sentiment driven investors leaving the sector.
Recovery comes in step two. Low valuations entice ‘cash rich' pharmaceutical firms seeking to replenish product portfolios ahead of patent expiries.
This catalyses M&A deal announcements and a rise in valuations.
The third stage is generally a longer period of relative stability and growth, characterised by consistent M&A deal flow and a steady stream of reasonably valued IPOs. Risk averse investors return, while companies find it easier to re-finance.
Stage four is the boom period.
The number of new investors entering the space drives stock prices higher, causing elevated valuations that often seem out of kilter with the underlying value of assets.
Amid high valuations, IPOs increase and private companies look to list at an earlier stage of their development.
This is unsustainable and soon gives way to stage five. M&A deals slow at this point, as pharma companies look to licencing deals as an alternative to purchasing inflated assets.
Many early-stage companies are suddenly considered risky, re-financing becomes problematic, and investors take profits, resulting in price corrections.
The investors ‘late to the party' then exit the sector, and the cycle resets.
With this in mind, we feel confident the M&A transactions of recent months offer strong evidence we are well into stage two.
Moving forward, we will continue to target assets that have demonstrated success in clinical trials, and those making good progress towards - or having already achieved - drug approval, such as many of the names mentioned above.
These seem to be catching the eye of the acquirers who are looking for de-risked assets to plug the holes left by patent expiries.
In addition, we will continue to focus on mitigating volatility risk within our portfolio by trading nimbly around our holdings' binary events, as well as by tilting our portfolio on a top-down basis away from riskier areas during periods of high volatility.
Marek Poszepczynski and Ailsa Craig are co-investment managers of the International Biotechnology trust