Outlook for 2024: Life sciences – where has the conviction gone?

2023 was another particularly tumultuous year for life sciences and, although the lingering effects of the last year are unlikely to change dramatically, the stabilisation of interest rates (off 16-year highs) and emerging direction of travel (market data points) tilt our bias to positive for the new year. We continue to view robust innovation for disease-modifying therapies as the focal point, but also value tangible solutions that may be more appealing to the broader investor base.

Out with the old…

As the smallest life science companies often champion innovation, they have the heaviest burden of proving safety and efficacy before commercialisation, which is either carried out by, or in some cases in collaboration with, big pharma on the back end. The required lengthy development horizon is particularly challenging in times of elevated interest rates as clinical activities are capital intensive. Although this was not a concern before 2021, elevated interest rates have adversely tainted investor sentiment, especially in 2023, reflected in the c 80% decline of microcap stocks included in the SPDR S&P Biotech ETF, XBI (since the peak on 8 February 2021 versus the c 25% overall ETF performance decline and a slight increase for large caps within the ETF), which has resulted in most of the smaller companies trading below cash.

…positive bias towards the new

We continue to believe robust science will prevail (as in previous cycles).

• An improving macro environment is expected to rally investor sentiment. With the stabilisation in rates, we have seen more market activity, including the announcement of large acquisitions to enter or expand into specialised areas, including AbbVie’s foray into CNS (Cerevel for $8.7bn) and entry into immunotherapy (ImmunoGen for $10.1bn); Eli Lilly and Novo Nordisk’s entry into cardiology (GLP-1s); and Bristol Myers Squibb (BMS) doubling down on CNS (Karuna Therapeutics for $14bn). Prior to these, we had observed tepid risk tolerance despite the approaching patent expirations for big pharma.
  • Big pharma companies cannot rely on their current portfolios (ie there is a need to refuel pipelines), resonating with Pfizer’s announced plans to eliminate $3.5bn in overhead with the displacement of COVID revenues.
  • Increased activity from alternative investors (with longer investment horizons) as they take advantage of the unique arbitrage opportunity (higher biotech cash levels versus market caps).
  • Overall increased funding and IPO activity.
• Innovative therapies and devices are expected to stem from smaller, more agile/entrepreneurial biotechs as development requires specialised resources.
  • Pared-down preclinical/clinical activity has resulted in robust surviving studies in more viable areas (eg quality, commercial potential).
  • Although disease-altering or new mechanisms of action remain the holy grail, generalist and more conservative investors have buoyed solutions with niche expertise and/or shorter development horizons.