When the market’s hot, go where it’s not: Biotech’s position of opportunity for FY26

FY25 has been one of the more challenging years for healthcare and biotechnology in recent memory. While broader equity markets have surged to new highs during the first half of 2025 (although hardly in a straight line!), during the first half of 2025, biotechnology experienced one if its worst periods of relative (under)performance.

We are reminded that biotech is a sector that, historically, has delivered compelling risk adjusted returns over the long term, with a low correlation to overall equity markets:

However, biotech has more recently experienced some of its largest relative underperformance compared to overall markets in the index's history, in this case compared to the ASX200 (TR).  The first occurrence being during the first half of 2022 and again more recently in the first half of 2025:

While the first bout of sector underperformance in 2022 was due to macroeconomic conditions (inflation & higher interest rates), the second occurrence has more to do with sector specific headwinds - headwinds we believe are overdone and will explore in more detail below. 

Yet, amid this turbulence, HB Biotechnology portfolios delivered 14%[1] for financial year 2025 – in stark contrast to the S&P Biotechnology Select Index which returned -9.4% over the same period in AUD terms, marking an HB Biotechnology outperformance of 23.4%.

Tariffs and Fed Policy

Inflation has been a major theme in investment markets since early 2022, however this appeared to be coming under control towards the end of 2024 with the US Federal Reserve (the Fed) signalling rate cuts ahead. This view was put on notice as following the US administration’s announcement on April 2 of larger than expected tariffs, resulting in a sharp downturn in equity markets – biotech included. 

Although a temporary pause in implementation a week later led to a swift rebound, the uncertainty has prompted a “wait and see” approach from the Fed. While the prospects of further trade tensions arise as we write this, rate cuts are still expected, and given biotech’s sensitivity to interest rates, this could be a meaningful tailwind in H2 and beyond.

FDA Leadership and RFK's Influence

The FDA has undergone significant changes, something we have written about in detail previously, yet the tone from new leadership—Marty Makary and Vinay Prasad—has been pragmatic and constructive. Their messaging has been broadly supportive of innovation and accelerated approvals, especially in rare diseases. 

However, given Robert F Kennedy’s (RFK) vocal stance on vaccines and recent actions such as overhauling the CDC’s ACIP panel, we continue to avoid vaccine exposure—a position we would hold regardless of the political climate. We are continuing to monitor the pace and quality of regulatory interactions with our portfolio companies, however feedback to date suggests the FDA remains functional and, overall, punctual.

Most Favoured Nation (MFN) Pricing

The MFN executive order remains a source of uncertainty. However, as we have also written about previously, we believe that implementation will be incremental and likely face legal and political hurdles. While this continues to be an overhang on the broader pharmaceutical sector, we believe the impact on biotech ultimately will be limited and therefore provides an opportunity to buy quality companies at discounted prices.

Maintaining Discipline

While headlines have been dominated by macro volatility and regulatory uncertainty, HB Biotechnology’s performance in FY25 was driven by what we’ve always focused on: fundamentals and continuing to apply our disciplined approach to stock selection and portfolio management.

When investing in the biotech sector, clinical setbacks are inevitable. Two portfolio companies faced clinical hurdles, including Opthea (ASX: OPT), whose Phase 3 results missed statistical significance (after higher than expected performance from the standard of care control group), and Pliant Therapeutics (NASDAQ: PLRX), who discontinued their lead program that was in a Phase 2b trial, following interim guidance from an independent Data Safety Monitoring Board.

Despite the setbacks our winners more than compensated for these clinical failures. Perhaps even more so than in other sectors of the market, due to the inherent nature of clinical trials, this remains one of the key reasons to invest via a well-curated portfolio of biotechnology stocks.

One of our largest winners during FY25 has been Verona Pharmaceuticals (NASDAQ: VRNA), a stock we have owned in client portfolios since 2022, through Phase 3 clinical readouts and FDA approval for their drug Ohtuvayre which is now recognised as the most successful drug launch in Chronic Obstructive Pulmonary Disease (COPD), ever. Since the conclusion of FY25, Verona announced it is to be acquired by Merck for $10 billion, a premium of 23% to its last close, and ~380% premium to is price a year ago.

Also contributing to performance was Vigil Neuroscience (NASDAQ: VIGL), which announced in May that it will be acquired by Sanofi for its small molecule TREM2 drug targeting Alzheimer's. This takes the total number of companies acquired from HB Biotechnology portfolios to 6 since launching in 2021, continuing our track record of having at least one portfolio company being acquired each year.

We have mentioned the Kymera Therapeutics' (NASDAQ: KYMR) KT-621 STAT6 protein degrader in a previous review, however this past quarter we were treated to a first glimpse of its potential where early stage healthy volunteer studies suggested that its target degradation and pharmacokinetics and pharmacodynamics (PK/PD) profile appear as good as or superior to Dupixent, a drug which generated US$14B sales in 2024. However, unlike Dupixent which must be delivered via injection, KT-621 comes in a convenient once-daily oral (pill) format.

A notable theme in the above companies is that they are not pursing oncology targets. Oncology still represents the largest sector of drug development, and still our largest portfolio exposure, however it has been a deliberate strategy for us to progressively de-weight our portfolios from oncology as commercial interest from large pharmaceutical companies in sectors such as Immunology and Neurology increase.

FY26 and Beyond

Looking ahead to FY26 and beyond, we remain optimistic that the relative underperformance of the biotech sector will reverse, while not being reliant on this outcome to generate returns. While our investment process is agnostic to interest rates, the sector’s sensitivity to rate cuts means any move from the Fed could provide a meaningful tailwind. More importantly, we believe the overhangs that have weighed on healthcare sentiment—MFN pricing, FDA leadership changes, and tariff uncertainty—will ultimately clear.

We believe our portfolio is well-positioned heading into FY26, no matter what macro environment we encounter, and eagerly anticipate multiple holdings approaching key clinical and regulatory catalysts in the coming quarters. No matter what macro environment we encounter, we remain focused on identifying high-conviction opportunities where the fundamentals—not headlines—drive value.