Biotech frontiers: The next wave of innovation

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This podcast is for general information purposes only and is not advice. Outside of the United States, this episode is intended for investment professional use only, not for further distribution. Please listen to the end for complete information.

Sal Rais
We're really in a golden era of drug development—we're able to make targeted, more effective, safer drugs at a pace that's faster than what we've ever been able to do.

Jennifer Martin
Welcome back to “The Angle” from T. Rowe Price, a podcast for curious investors. I'm your host, Jennifer Martin, a global equity portfolio specialist at T. Rowe Price Associates here in Baltimore.

This season, we're focusing on the exciting innovations taking place within health care, and, for this episode, we are focused on the biotech industry. Biotech stocks as a group have struggled since the pandemic, but innovation continues to accelerate, resulting in new drugs that can potentially lead to better outcomes for patients.

Here to help us get the lay of the land and explore these innovations is Sal Rais, a health care portfolio manager and biotech analyst for T. Rowe Price Investment Management.

Welcome, Sal. It's great to have you on “The Angle.”

Sal Rais
Oh, thank you so much for, for having me.

Jennifer Martin
Well, biotech investing requires a deep understanding of science and industry dynamics, not to mention the regulatory environment. We'll explore all three today. But we should start with what's been going on in the market.

Sal Rais
Well, we'll start with the bad news first. It's actually been a pretty ugly last five years for biotech, but there's actually been a lot going on underneath the surface. And, you know, we'll get into some of that. But I'm actually really optimistic on the outlook from here.

Jennifer Martin
So, we pulled the data from the end of 2020 to the midpoint of this year, the S&P Biotechnology Select Industry Index lost more than 40% of its value. Why have biotech stocks as a group been under so much pressure for the last several years?

Sal Rais
During 2017 to 2019, we really had FOMO [fear of missing out] in this space. You had a ton of capital coming into biotech. You had a huge number of companies that went public. And so, the universe of biotech went from about 300 public biotech companies to more than 600. And so, over this very short amount of time, the universe expanded really rapidly. And, frankly, there weren't enough really high-quality molecules, really high-quality management teams to support such a huge expansion. And so the average quality of the companies actually went down quite a bit. And so that was really kind of the, the biggest issue.

Now right after that, in 2020, we went into COVID. And so you had this brief period of time where you really had a lot of excitement in the space because we made good progress with the COVID vaccines, we made good progress with treatments, diagnostics, etc. But that was very short-lived. Right on the other side of that, you had companies that had years of pull-forward and really difficult comps for the next several years. So you had this really brutal COVID hangover throughout the space. And then also during COVID, you had a ton of inflation in the system.

And so interest rates had to go up. And, you know, biotech companies, they don't have revenues or earnings for years. And so they're among the most sensitive to cost of capital, interest rates. And so, you know, this inflationary period that we've had for the last few years, that's also put a ton of pressure on the biotech space. But during that time, we've had really steady progress with science innovation.

And so, that performance doesn't really capture what's been going on under the surface.

Jennifer Martin
Well, I can see why smaller biotech companies would be sensitive to interest rates and how an influx of lower-quality companies would weigh on performance. So what's happening on the science front that could be encouraging?

Sal Rais
Overall, in the last 10 to 15 years, um, our understanding of how different diseases—how they work at a molecular level—that has improved significantly. And so, you know, you've had the Human Genome Project. You've had the integration of CRISPR into laboratory research. And all of these things have helped us understand and identify better targets to go after to treat a disease.

And then also during that time, over the last 10 to 15 years, the toolkit of modalities that we have available to go after those targets has expanded significantly. So, historically, you used to have just small molecules and antibodies. Now we've made good progress with, uh, those modalities over the last few years. But now you have oligonucleotides, bispecifics, protein degraders, gene editing, gene therapy, vaccines, Car-T cell therapy.

So now you have this broad toolkit of modalities to go after the target. And so, actually, I feel like we're really in a golden era of drug development— we're able to make targeted, more effective, safer drugs at a pace that's faster than what we've ever been able to do.

Jennifer Martin
Well, those modalities that you shared is a little bit like alphabet soup. I don't even know if I could spell half of them. But I think what's energizing is that you probably can make some of these trends a little bit more concrete for us. So, can you walk us through an area where this deeper understanding of biology and emerging drug types are showing real promise in improving patient outcomes, and also, creating growth opportunities for companies?

Sal Rais
Sure. So Car-T and bispecifics in cancer—that's been a really exciting area. So CAR-T cell therapy is a type of immunotherapy. CAR stands for chimeric antigen receptor. This is really something out of science fiction. So, you take a patient that has cancer, you remove their T-cells, which are just the normal part of the immune system of the patient. And then you genetically modify those T-cells, and you end up making these super T-cells that you put back into the patient. And what that does—it actually is able to find the cancer and kill it. And so you end up having these curative-like outcomes in certain types of cancers. It's just incredible what, what that technology has been able to do. Now it's complicated to manufacture. It's costly. You can only get it at, you know, selected academic centers. And so CAR-T has those drawbacks.

Now contrast that to bispecifics. Uh, these are off-the-shelf treatments. Um, they're much lower cost. They can be combined with other types of cancer treatments. They don't have the same depth and durability of efficacy that CAR-T has. But with having both options, you now have CAR-T that's a good option for more severe patients later line and bispecifics, which are better for less-severe patients, earlier line of treatment and can also be combined. And so you can start to segment out a particular category and pick what modality is optimal for the patient's needs.

Now the thing that's really cool that's happened is that, you know, we've used CAR-T and bispecifics in cancer, but we've started to treat the first batch of patients with these modalities in autoimmune as well. And we've seen curative outcomes in some of these patients. And so that's the really cool thing about biotech where you take this insight and understanding of what CAR-T and bispecifics can do in cancer, and then you can then apply it to a totally different area, like autoimmune, and, you know, have this like remarkable outcome.

Jennifer Martin
It is super encouraging to hear all of this science. And I think everyone listening was also probably appreciative of your science fiction reference because it does sound really complicated but encouraging that we're going to have a lot of different ways of approaching these different therapies. And for all those science fiction people out there, I do love Margaret Atwood. She's my favorite.

So I think you gave us some great examples of how innovation can improve human health and create value for companies that are commercializing these drugs. But I keep thinking about the tension between the influx of lower-quality biotech companies and the innovations that are unlocking really new ways to treat diseases more effectively. It sounds as though that divergence would make your job even harder.

So drug trials still routinely fail. So do many biotech companies. So what is distinguishing the pie-in-the sky science projects from drugs that have the potential for clinical and commercial success?

Sal Rais
That dispersion is really exciting. Every single year, regardless of how the space is doing or how the market is doing, you can find winners that make significant progress with differentiated medicines. It's really a stock pickers’ space.

Now, it's really difficult in that you have significant volatility. You have these binary outcomes where—either you have a drug, or you don't. You have to have a really broad skill set. You have to be able to evaluate the science. You have to be able to forecast out the commercial opportunity. You have to be able to evaluate a broad range of management teams, figure out which ones are good, which ones are not as good. And so it's very difficult from that standpoint, but that's also what keeps it really interesting all the time because you have that significant dispersion, and you have the complexity of all these attributes of finding the best companies in the space.

Jennifer Martin
Between management, potential for commercial success, and science, there is a lot to consider. Can you provide an example of how it all comes together?

Sal Rais
Sure. One platform company that we followed for many years—they’ve, they’ve developed multiple drugs for rare disease, but in the last few years they started going into much bigger markets. They've made progress in the space of cardiac TTR. This is a condition where you have this toxic protein that accumulates in the heart, and that causes a lot of damage and dysfunction to the heart. Patients die within a few years of being diagnosed, so it's an extremely severe condition.

And so we had this scientific insight that, this particular platform company, they were developing a medicine that actually shut down the production of that toxic protein. So that was the key insight that really drove our high conviction in the company.

Now in biotech, things are never, you know, straightforward or an easy path. And so, we've known this company for years. It's a great management team. Six months before their phase three readout, they actually made several changes to the design of the trial. And so that spooked their market. You know, the stock sold off significantly. And we still maintained our conviction that this approach would work extremely well.

Six months later, they reported out the results, and the benefit was more substantial than anyone would have ever expected. You saw a significant reduction in mortality. And then a few months later, after the, the initial readout, I actually went to London to see the detailed data presented at a medical conference. And even with that update, the stock sold off significantly because people started to have very high expectations.

Now, the drug has been in the market for a few months, and we’ve started to see very good commercial uptake of the medicine. And so, it's a company that we've tracked for years. It took a long time to really start to see the value creation of this medicine that they developed. And there were so many times along the way that the market almost, you know, lost faith.

And, and so, it took, you know—you had to have the scientific insight. You had to have the long-term view. You had to have the conviction to see it through, regardless of the volatility. And when you do that, the value creation can be substantial. The market cap of this company has more than doubled over the last two years, and, you know, you've now developed this amazing medicine for patients as well.

Jennifer Martin
That is a great example of why understanding the science and the business is so important in biotechnology. I mean, honestly, the patience and conviction you have to have in this space is in its own class. I do spend a lot of time with our technology portfolio managers, and I helped host a season of “The Angle” that focused on artificial intelligence. You know, what are you watching on the AI front, either just from the companies on how they're utilizing AI or even how you're operationalizing it in your own work?

Sal Rais
So what's really interesting is for every drug that gets developed, usually it comes from a batch of a few million different molecules. And what AI is helping to do in biotech is identify and optimize—you know, of those millions of molecules with very small differences, which few are going to have the best attributes of efficacy, safety, potency, dose, etc.

And so the compute power of AI is helping on that front. The other thing the health care team has been looking at is, you know, I talked about how it's a very binary space. You have a clinical trial readout and either you have a drug, or you don't.

When you're able to shift the odds of being able to predict those clinical outcomes, that can create significant value. And so we’ve been really looking closely at how do you use AI to evaluate clinical databases that help us better predict outcomes for these trials. You know, it's an area we've been focused on for some time, and [I’m] optimistic about what that might be able to do over time.

Jennifer Martin
Well, it sounds like AI is going to create a lot of value in the biopharma industry. And it also sounds like it's going to help you a little bit with maybe productivity, maybe efficiency. So maybe let's shift gears to another source of potential disruption. You can't talk about health care without discussing what's happening in Washington, DC. With all the funding cuts and other changes, how could the uncertain outlook for health care policy affect drug development and approvals?

Sal Rais
There have been a lot of headlines the last few months. We've had layoffs at the FDA, cuts at NIH, and that's certainly created worry. What we've seen so far, though, is that the new leadership at these agencies, they've actually taken a very pragmatic approach. And so, when you look at the cuts that have happened at the FDA, none of those have happened in the area of, uh, drug reviews, drug approvals, inspections, etc.

That core function of the FDA, so far, has not been impacted. Um, the other thing we're starting to see is much more open communication from the agencies. They've historically been a bit of a black box. You don't really know what's going on behind the scenes. And the new leadership has tried to, you know, give a lot more visibility on how they're making decisions, how they're going to be able to reduce red tape to actually speed up the drug-approval process. So, despite the worry over the last few months, I'm actually quite optimistic that in a few years we could start to see the pace of drug approvals actually accelerate versus what's happening right now.

Jennifer Martin
That's a great insight. And so, you know, Sal, it's been so much fun. We've learned a lot. And I know we're coming up on time. So, my last question: What emerging areas of innovation excite you from a human health perspective over the next decade? What are you watching on the cutting edge?

Sal Rais
Gene editing is a really fascinating area. So CRISPR won the Nobel Prize back in 2020, and we have the first ever CRISPR drug therapy available right now. What's less obvious is we've made a significant amount of progress in the next-generation technologies for gene editing. We have now version 2.0 base editing, version 3.0 prime editing.

The first patient ever was treated with prime editing just a few months ago, and people were looking for about a 20% improvement in the condition, and that patient actually had a 70%-plus improvement. And so, it just goes to show you how powerful these technologies can be. Now it takes a long time to develop these medicines. But over the next ten years, I'm really excited to see how they can transform different areas of drug development.

Jennifer Martin
I think that's a perfect ending note. Thank you, Sal, so much for taking us on really a whirlwind tour of your world of biotech.

Sal Rais
Thanks for inviting me. Biotech is constantly evolving, and so there's always something new to talk about, and I hope we get a chance to do it again.

Jennifer Martin
There you have it. Thanks again to Sal Rais for his time and insights. Our conversation gave me a better understanding of the challenges that the biotech industry has faced over the past several years, but it also left me with a lot of hope. Accelerating innovation is creating new ways of treating disease that can improve human health dramatically. And breakthrough drugs can create a lot of value for the outlier companies bringing them to market.

Jennifer Martin
Thank you again for listening to “The Angle.” We look forward to your company on future episodes. You can find more information about this and other topics on our website. Please rate and subscribe wherever you get your podcasts. “The Angle”—better questions, better insights only from T. Rowe Price.

Disclosure

CRISPR stands for clustered regular interspaced short palindromic repeats. It is a low-cost and easy-to-use gene-editing technology.

Cardiac TTR, or transthyretin amyloid cardiomyopathy, is a potentially fatal disease of the heart muscle.

FDA is the U.S. Food and Drug Administration.

NIH is the U.S. National Institutes of Health.

This podcast episode was recorded in July of 2025 and is for general information and educational purposes only. Outside the United States, it is for investment professional use only. It is not intended to be used by persons in jurisdictions which prohibit or restrict distribution of the material herein. The podcast does not give advice or recommendations of any nature or constitute an offer or solicitation to buy or sell any security in any jurisdiction. Prospective investors should seek independent legal, financial, and tax advice before making any investment decision. Past performance is not a reliable indicator of future performance. All investments are subject to risk, including the possible loss of principal. Discussions relating to specific securities are informational only, and are not recommendations, and may or may not have been held in any T. Rowe Price portfolio. There should be no assumption that the securities were or will be profitable. T. Rowe Price is not affiliated with any companies discussed. The views contained herein are of the speakers as of the date of the recording and are subject to change without notice. These views may differ from those of other T. Rowe Price associates and/or affiliates.

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