The biotechnology industry is beginning to show renewed strength. After a prolonged period of lagging performance, especially among smaller and mid-sized firms, a combination of scientific advances, evolving market conditions and improving investor sentiment is laying the groundwork for a potential turnaround. For those with a long-term perspective, this moment presents a chance to engage with a sector known for innovation and high growth, now available at attractive valuations.
Beyond its financial potential, biotech innovation yields significant impact. Innovations in the field are extending life expectancy, increasing quality of life and treating previously neglected diseases. For impact investors, this is where capital meets tangible social value.
Scientific progress outpaces market performance
Between early 2021 and mid-2025, the valuation of small-cap biotech stocks, as tracked by the Russell 2000 Biotech Index, fell by 47%. In contrast, the broader market, represented by the S&P 500, rose by 67%.
The difference is due in part to macro headwinds affecting the sector, alongside pharmaceutical tariffs and job cuts at the federal agencies responsible for drug approvals. Yet the disconnect between market pricing and scientific progress is becoming increasingly apparent. The pace of innovation is strong — and accelerating through the use of AI — with new therapies and technologies continuing to emerge.
Notable recent developments include:
- Clinical trial results for ivonescimab, a novel bispecific antibody for lung cancer, which demonstrated a 49% reduction in disease progression compared to Keytruda, the current standard of care.
- Gilead Sciences’ lenacapavir, a long-acting drug for HIV prevention, showed near-complete protection against infection in high-risk groups and has received FDA approval.
- Akero Therapeutics’ efruxifermin, a fibroblast growth factor analog, produced histological improvements in liver disease, reversing cirrhosis to earlier stages, a result not previously seen in clinical trials.
These examples underscore the sector’s ability to deliver meaningful clinical impact, which I have witnessed firsthand in my work at The Biotech Growth Trust.
Regulatory support fuels innovation
The biotech sector’s progress is being reinforced by strong regulatory backing. In 2024, the FDA approved 59 new drugs, many of which employed cutting-edge technologies to tackle serious diseases.
Accelerated approval pathways have become a vital tool for biotech firms, especially smaller players that depend on timely regulatory decisions to attract investment and form strategic partnerships. These pathways also offer hope to patients awaiting effective treatments.
The FDA’s willingness to embrace novel therapeutic approaches including gene therapies, RNA-based treatments, and cell therapies has helped validate emerging platforms and draw global capital into the sector. The agency’s collaboration with international regulators is also smoothing the path for cross-border clinical development, further advancing the global reach of biotech innovation. Despite political uncertainties, the overall regulatory environment appears to be positive, with the Trump administration looking to reduce regulatory hurdles and expedite the drug development process.
Strategic investment and M&A activity resumes
Major pharmaceutical companies are facing the expiration of patents on key products, prompting a renewed focus on acquisitions. Innovative biotech firms are increasingly seen as valuable targets for larger players seeking to strengthen their pipelines and maintain market leadership.
Recent deals reflect this trend. For example, Johnson & Johnson acquired Intra-Cellular Therapies, a company specializing in psychiatric treatments, for $14.6 billion. Merck KGaA purchased SpringWorks Therapeutics for $3.9 billion, gaining access to OGSIVEO, the first FDA-approved treatment for desmoid tumours, a rare and recurring connective tissue condition.
These transactions signal a supportive environment for early-stage biotech firms, whether they aim to scale independently or exit through strategic partnerships. Although M&A activity slowed in 2024, it has accelerated in the first half of 2025, driven by the need for innovation and pipeline renewal.
An opportunity presents itself to investors
Biotech’s inherent volatility is often viewed as a risk, but it also presents strategic opportunities. The sector’s rapid pace of change, driven by scientific breakthroughs, evolving clinical data and regulatory shifts, creates fertile ground for investors who can navigate its cycles.
For those willing to engage with the sector’s dynamics, short-term market dislocations can offer entry points into undervalued assets. Tactical positioning around key events such as trial results, regulatory decisions, and partnership announcements can yield long-term rewards.
Current valuations are lower than those seen during the dot-com crash and the 2008 financial crisis. With innovation accelerating and global interest rising, the sector appears poised for renewal. For investors who believe in the transformative power of science, this is a moment to consider biotech not just through individual funds, but across the full spectrum of international innovation.
Biotech breakthroughs have the potential to transform lives for patients with HIV, cancer and a wide range of neglected diseases. For impact investors, now is the time to identify biotech companies delivering outsized social and clinical impact.
Geoff Hsu is a portfolio manager at The Biotech Growth Trust.
Guest posts on ImpactAlpha represent the opinions of their authors and do not necessarily reflect the views of ImpactAlpha.
