Introduction
In late 2023 we wrote a piece entitled Biotechnology: a growth opportunity in a value disguise[1] wherein we set out the investment case for biotech to be a component of client portfolios. Unfortunately, our timing appears to have been premature because since then the sector has been lacklustre[2]. As readers might expect, we continually monitor the investments we make on behalf of clients. Therefore, it is our responsibility to reassess the investment case in circumstances such as this and decide whether we have got it wrong.
Are we wrong or is the market….?
Our investment philosophy is such that we give effect to investment opportunities we like in as direct a fashion as possible. In practice this involves buying the shares of companies exposed to the actual opportunity. The exception to this rule is where we believe serious expertise is required by a third-party to maximise the potential for investment returns. Biotech is just such an exception.
RTW Biotech ‘RTW’ is a London Stock Exchange listed investment company which has for several years been our preferred holding for accessing the biotech sector. The team that manages this investment company are headquartered in New York, also with offices in London and Shanghai. In mid-June we were fortunate enough to meet with in London one of RTW’s leadership team, Peter Fong, PhD. This meeting had these objectives. First, we were seeking reassurance from Peter that the biotech sector was fundamentally still good value. Second, we wanted to know which particular themes in biotech they were most excited about, and finally, what impact if any would AI have on their industry. This is something we now ask management teams in all our investments.
Cheap biotech assets with potential for profit growth
The presentation from RTW contained compelling statistics demonstrating that biotech remains cheap in relation to its own history. However, most striking is the fact that based on their estimates, 32% of US Biotech companies trade below their balance sheet cash [3]. This is an astonishing observation, which implies to us that investors do not believe that a considerable proportion of listed biotech companies will generate any cash. This seems too pessimistic an assessment by the market.
RTW structure their portfolio with six key investment themes as a foundation. Within their Cardiometabolic theme lies various obesity interventions which have the enormous potential to alleviate this epidemic [4]. The much publicised and revolutionary drugs [5] presently in the market for obesity have some unpleasant side effects. RTW has within their portfolio a number of next generation drugs that should challenge the incumbent therapies by exhibiting less side effects and better effectiveness. Health care is a large part of state expenditure in many heavily indebted Western countries, including the UK.
In recent years the stigma associated with depression has begun to fade. Perhaps more surprisingly still is the extent to which various psychoactive substances [6] have also begun to receive acceptance from serious researchers as potentially being effective treatments for this terrible condition. Again, RTW are supporting companies involved in the treatment of this debilitating affliction, particularly in the UK.
Drugs and medical devices are subject to rigorous investigation by various government agencies before they are made available for distribution. The approval process can take many years and is obviously costly. Companies with drugs or devices in development have nothing yet to sell. Meanwhile they must rely on their financial backers to keep the operation afloat. Peter explained that AI is proving useful in potentially shortening the drug development cycle. By doing so, treatments can be made available to patients sooner and with less cost. More drugs coming to market sooner will bode well for biotech.
The importance of political support and insider buying
One perennial source of anxiety for the biotech and wider pharmaceutical industry is that healthcare costs are a political issue. This is particularly true in the United States, which is the largest healthcare market in the world[7].
It is therefore encouraging to see that the US Secretary of Health Robert F. Kennedy is so supportive of the sector[8]:
“We know the power of U.S. biotech. It’s time to let it flourish — not tie it up in red tape, misalignment, and a process that gives the edge to foreign interests and large incumbents. We’re clearing the path to transform great science into real cures, at lower costs, and better health for the American people. Life science and biotech are at the heart of that!”
A key component of our investment research process involves assessing the degree to which insiders, particularly management, demonstrate their confidence in the businesses they manage on behalf of our clients. Positive pronouncements in the press or on earnings calls are not sufficient. At Whitman we want to see management teams investing their own money alongside our clients. In February 2025, RTW Chief Investment Officer Rod Wong increased his stake in RTW to 15% [9] and RTW Biotech’s board of directors has similarly been increasing their holdings. For us this is a significant indication of the alignment RTW’s management and board have with their investors.
Investment conclusion
In summary and after careful reconsideration we believe biotech remains an exciting prospect in client portfolios. The asset class is cheap on a historical basis, has meaningful scope for growth and is supported by the important fact that management teams remain committed.
[1] https://whitman.co.uk/news/biotechnology-a-growth-opportunity-in-a-value-disguise/
[2] https://www.nasdaq.com/market-activity/etf/xbi/advanced-charting?timeframe=5y
[3] Formally such a situation occurs where cash exceeds the market capitalisation (price multiplied by issued shares) of a company.
[4] https://www.theguardian.com/society/2025/mar/03/more-than-half-of-adults-worldwide-obese-by-2050-report-
[5] The most notable of which are Wegovy and Ozempic
[6] Particularly DMT (Dimethyltryptamine) see further https://www.ghres.com/scientific-publications
[7] https://www.benchmarkintl.com/insights/2024-global-healthcare-medical-industry-report/
[8] https://x.com/SecKennedy/status/1936199106936160516
[9] https://www.londonstockexchange.com/news-article/RTW/rtw-cio-increases-position-to-15/16914889. In the interests of transparency, the author has a position in RTW within their SIPP
