Drugging the undruggable: How biotech innovation is creating opportunities for investors

The biotech industry has been facing uncertain government policies and a challenging funding environment. Even so, we are living in a golden age of drug discovery.

Central to this acceleration in drug development is the biopharma industry’s higher‑resolution understanding of the behavior of biological molecules—including DNA, RNA, and proteins—and how they differ between healthy and disease states.

“...we are living in a golden age of drug discovery.”

Deeper insights into how our bodies regulate protein production and the roles that these proteins play in complex biological systems are giving rise to therapeutic approaches that treat diseases in new ways. Small‑ and mid‑cap biotech companies are driving this acceleration in innovation and drug discovery, potentially improving patient outcomes and creating shareholder value as these medicines come to market.

How technology is deepening our understanding of human biology

The Human Genome Project, which was completed over two decades ago, helped to set the stage for much of today’s biotech innovation. This international effort began in the early 1990s, cost the U.S. about USD 2.7 billion, and 13 years later culminated in a map of the roughly 3 billion base chemical pairs that make up the genetic code found in each cell of the human body.

Sequencing the human genome did not immediately lead to the hoped‑for wave of medical advances, even if it unlocked the DNA blueprint that defines life. Most human diseases result from interactions between our genes, their expression, and our environment. These complexities aren’t as neat and well-defined as our genes.

Over time, however, the declining cost of genome sequencing and the increasing availability of high‑resolution tools for use in experiments have helped researchers to deepen their understanding of human biology and gain unique insights into the drivers of human disease. These insights are catalyzing new therapies whose impact is just starting to be realized.

Bigger data: Advances in genomic sequencing and increased computing power have driven costs considerably lower¹, enabling researchers to create large‑scale datasets of biologic information and run experiments comparing the genetic makeup of tens of thousands of healthy individuals to those with a disease. Using this big data can help to identify the changes in gene and protein expression associated with that pathology. These data‑intensive approaches are beginning to yield insights into the causes of human disease and are helping researchers to find new drug targets.

Better visibility: Progress in visualizing the structure and motion of proteins has begun to revolutionize drug development. High‑resolution cryo‑electron microscopy, for example, and other technologies have improved our understanding of protein structure as well as how these biomolecules move and interact with one another. With this lifelike level of detail, researchers have been able to differentiate between healthy and disease‑causing proteins and to identify the areas of a protein’s structure that are most essential to its function. These findings are guiding the development of selective medicines that can target specific disease‑causing proteins while sparing healthy ones.

Faster insights: Better research tools have increased the fidelity of the data gathered during experiments and accelerated the timelines of scientific and drug discovery. The automation of laboratory processes, for one, has led to improved efficiency, precision, and repeatability. The proliferation of CRISPR (clustered regularly interspaced short palindromic repeats) Cas9 systems in laboratories has also been critical. These low‑cost and easy‑to‑use genetic editing tools have helped researchers to better understand the function of specific genes and the proteins that they instruct the body to produce. Researchers can eliminate certain genes or introduce mutations within a model system and then study the effects. Through advances in flow cytometry and sequencing, analyses can be performed at the single cell level, allowing researchers to identify cells and/or pathways that contribute to a disease’s process. Previously, it could take years to map out a biologic system and pinpoint the function of a specific protein. These pathways can now be established in weeks to months, which is generating more biomedical insights more quickly.

A golden age of drug discovery

A better understanding of human biology and the drivers of certain diseases has accelerated drug development, giving rise to novel classes of medicines that can stop the activity of harmful proteins or restart the production of beneficial ones.

This wave of innovation is catalyzing new therapies that can improve the outcomes for patients suffering from currently treatable diseases while opening the door to developing medicines for disorders that the biopharmaceutical industry had not yet been able to address.

Four promising modalities for drug development

1. Gene therapy

Small errors in the DNA sequence can lead to the development of devastating diseases. These genetic mutations mean that the body’s cellular machinery receives faulty instructions for making proteins, which results in a lack of healthy proteins or the production of ones with structural or functional abnormalities. Roughly 20,000 genes are encoded by the human genome, and mutations that affect the function of a single protein can have catastrophic effects on life.

New classes of drugs seek to address diseases caused by a single gene mutation (monogenic disease) at their root by replacing the missing gene or modifying the mutant variant.

Prior to the emergence of these medicines, many treatments for rare monogenic diseases had focused on managing symptoms. In some cases, the missing protein can be synthesized in a lab and administered to the patient via intravenous infusion. This approach can provide some relief to patients, as it can blunt the disease’s progression. However, it typically involves the burden of weekly visits to a health care provider.

Gene therapy seeks to treat diseases stemming from a genetic defect by repurposing a virus to deliver a healthy version of the gene into a cell. From there, the cell can use the transferred gene (transgene) to create copies of the missing protein, restoring its lost function and reversing the disease process.

Notable successes: This class of drugs is still in its early innings, with a treatment of a rare form of inherited blindness in 2017 becoming the first gene therapy product to secure approval from the U.S. Food and Drug Administration (FDA). In subsequent years, gene transfer has demonstrated several successes. Spinal muscular atrophy (SMA), for example, is a devastating neurological condition that limits the development of motor function and leads to early death. A mutation in the SMN1 gene causes the body to not produce enough of the protein that motor neurons—the nerve cells that enable movement by transmitting signals from the brain to the spinal cord—need to survive. An FDA‑approved gene therapy delivers the genetic information encoding for a functional SMN1 protein to motor neurons, stopping the progression of SMA.

On the horizon: Using a virus to transport the corrected genetic material to the cell involves some challenges, including the potential for the body to attack the cargo carrier. This immune response may limit the ability to re‑dose patients, a concern because the treatment’s benefits may wane over time. For this reason, gene therapies tend to be best suited for diseases affecting tissues that regenerate more slowly or that don’t replicate at all. Efforts to deliver the genetic payload in ways that allow for patients to receive follow‑on doses bear watching.

2. Gene editing

Gene editing has emerged as an area of focus for the biopharma industry because it strives to cure genetic diseases by making permanent changes to a patient’s genome to remove, replace, or repair the mutation causing the disease. Today, this therapy often uses CRISPR techniques that leverage the bacterial immune system to cut DNA at specific points, allowing for the target gene to be either silenced or deleted, the insertion of a new gene, or the modification of a particular gene’s sequence.

Notable successes: Gene editing has been successfully developed to treat sickle cell disease, a hereditary disorder where a mutation in the hemoglobin gene causes red blood cells to become crescent shaped. These misshapen cells can clump together, restricting blood flow and the delivery of oxygen to the body’s tissues, leading to severe pain and organ damage. Edits to the patient’s blood stem cells eliminate the gene that regulates the transition from fetal to adult hemoglobin, a process that naturally occurs after birth. After these modified blood stem cells are transplanted back into the patient, they take up residence within the bone marrow and give rise to red blood cells with fetal hemoglobin that do not sickle.

On the horizon: More work needs to be done to de‑risk the modality and address concerns about its long‑term effects and the risk of off‑target gene edits that could result in genetic mutations that cause cancer or other diseases. First‑generation approaches to gene editing primarily sought to eliminate disease‑causing genes; newer iterations focus on changing the genetic code at a single site (base editing) or over short stretches of DNA (prime editing). Advances in delivery mechanisms for these therapies, which are currently limited to making changes in liver cells or in blood cells, will be important in expanding the range of tissues and cell types that can be targeted.

3. Oligonucleotide therapies

Oligonucleotide therapies are a promising class of genetic medicines that deliver small, synthetic pieces of DNA or RNA into cells to intercept the messages that encode for protein production. Once inside a cell, these drugs can modulate protein expression, either turning off the formation of harmful proteins that drive a disease process or turning on the production of beneficial ones when too little protein is being produced.

“The way in which oligonucleotides work can...open the door to treating diseases that had been undruggable.”

The way in which oligonucleotides work can lead to improved efficacy relative to conventional drugs and open the door to treating diseases that had been undruggable.

• Efficacy: A drug’s ability to impact its target is directly related to its levels within the body. For traditional small‑molecule drugs, which are absorbed into the blood, their maximal effects occur shortly after the drug is ingested and wane as the drug is cleared from the body, typically in less than 24 hours. Oligonucleotide drugs, on the other hand, can be given once and persist in the body at effective levels for months, enabling continuous activity against their targets. These advantages offer the potential for long‑term disease control, versus the peaks and troughs of activity seen with small‑molecule therapies (Figure 2).
• Druggability: Focusing on the messages that regulate protein production also widens the universe of diseases that oligonucleotide therapies could treat. Only a fraction of proteins feature binding pockets where small‑molecule drugs can dock and affect the protein’s function, limiting the number of targets that can be drugged via conventional methods. Oligonucleotide therapies offer the ability to target any protein encoded within the genome because they recognize a portion of the linear genetic sequence that defines a protein, as opposed to attaching to its complex three‑dimensional structure. This approach opens a universe of targets that were previously undruggable.

Early efforts with this modality have focused on proteins that the liver produces and excretes. Diseases compartmentalized in the central nervous system, where the drugs can be directly injected, have also been targets. Ongoing advances in the design and delivery of oligonucleotide therapies—for example, efforts to deliver these drugs into muscle, skin, heart, or adipose—could expand the range of tissues that they can access and diseases they treat.

Notable successes: Hereditary transthyretin‑mediated amyloidosis (hATTR) is a rare condition that causes the buildup of protein fibers called amyloids in tissues and organs, impairing their function. In the peripheral nervous system, for example, these amyloid deposits can cause pain and loss of sensation in the arms, legs, hands, and feet. Whereas past treatments aimed to stabilize the mutant protein and slow its deposition, an oligonucleotide therapy reduces the levels of the RNA that encodes for the TTR protein, blocking its production. With the flow of toxic protein stopped, the body can repair the damage that was caused by the protein aggregates, restoring normal function.

On the horizon: Potential treatments for hypertension and heart disease are in development. For protein‑folding diseases such as Alzheimer’s, where toxic proteins accumulate in tissues, impairing their function and leading to significant morbidity and mortality, these drugs have the potential to block the disease’s progression by preventing protein aggregates from forming. As biopharma companies gain experience with oligonucleotide therapies, we could see an influx of promising new medicines and programs.

4. Targeted protein degradation

Every human cell contains a natural quality control mechanism that regulates protein lifespan and clears damaged proteins. This ubiquitin‑proteasome system has several different components that work through a coordinated process to attach a small molecular tag, ubiquitin, onto a protein, flagging it for destruction by the cellular garbage disposal, the proteasome. Here, the ubiquitin‑tagged protein is broken down into its component parts (amino acids), which are used to fuel new protein synthesis.

Recent insights into the components of this pathway and the rules governing this process have enabled the development of a new class of small‑molecule medicines called targeted protein degraders (TPDs).

By creating a transient interaction between the ubiquitin machinery and a target protein, TPD drugs can force a protein to be destroyed by the proteasome. Leveraging this natural pathway, drug developers can remove the harmful effects of a protein and select targets that play either direct or indirect roles in the disease process, giving increased flexibility in how to treat a disease.

This emerging modality offers the advantages of traditional small‑molecule drugs, which can be taken orally and can access all cell types, while providing new functionality that could expand the universe of druggable targets.

• Increased potency: Traditional small‑molecule drugs bind to a targeted protein and block its function on a one‑to‑one basis (Figure 3A). TPDs, on the other hand, are catalytic, meaning that one molecule of drug can force the destruction of many instances of the target protein. For this reason, a smaller dose of the drug is required to produce the desired therapeutic effect.
• Safety and selectivity: Making a highly specific small‑molecule drug represents a major technical hurdle because proteins can exhibit significant structural similarities, especially in the small regions, the active site, where drugs can bind and alter their behavior (Figure 3B). TPD binding isn’t limited to the active site of a protein. With this approach, researchers can take advantage of the more pronounced structural differences between closely related proteins that exist outside of the active site to design a drug that is exquisitely specific for its target (Figure 3C). Enhanced specificity helps to reduce a drug’s off‑target effect, which can improve its safety and tolerability.
• Druggability: Many therapeutically attractive targets lack well‑defined pockets to which conventional small‑molecule medicines can bind and inhibit the protein’s function. These proteins are considered undruggable. TPDs do not require as strong of a molecular interaction, giving them greater flexibility in where they attach to a target to bring it into proximity to the cell’s protein disposal machinery. This versatility gives TPDs the potential to expand the druggable universe beyond classical targets (Figure 3D), including scaffolding proteins. These specialized proteins gather and coordinate multiple proteins into complexes that transmit the signals driving key cellular processes. In a diseased state, these signaling pathways may become overactive. TPDs can remove the scaffolding protein, causing these multi-protein complexes to collapse and stopping their signaling.

Notable successes: Early TPDs—immunomodulatory drugs used to treat multiple myeloma, a type of cancer that forms in plasma cells—were discovered by serendipity. As researchers’ understanding of these small molecules has advanced over the past decade and a half, more rational approaches to drug design have emerged. The first batch of this generation of rationally designed TPDs are progressing through clinical trials and have shown promise for targeting cancers.

On the horizon: TPD discovery and development are still in the earliest stages. The initial wave of drugs is targeting proteins inside the cell. Next‑generation approaches are focusing on extracellular proteins, as delivering these medicines to specific tissues can improve their safety profile. Better understanding of protein degradation pathways could enable new approaches to treating disease. As researchers identify new therapeutic targets, TPDs could emerge as a leading treatment mechanism because of their advantages relative to genetic medicines and traditional small‑molecule drugs.

Biotech investing requires a deep understanding of science and business

Scientific and technological advances are creating more opportunities to bend the curve on human diseases by expanding the druggable universe and improving patient outcomes through increasingly precise and longer‑lasting medicines.

This promising innovation wave has not been captured in the S&P Biotechnology Select Industry’s Index’s performance. Why have biotech stocks underperformed as a group?

• Technical difficulty: Drug development is risky. Only 10% to 15% of drugs that begin clinical testing ultimately obtain FDA approval. Common causes for failure include weaker-than-expected efficacy or unanticipated toxicity when drugs move from preclinical models to human trials. Understanding a disease’s underlying science and biology helps to separate the drugs that can improve patients’ health meaningfully from those with lower odds of clinical success.
• Competitive threats: Developing an FDA-approved medicine does not guarantee commercial success or strong stock performance. Competition is intense. An extended period of near-zero interest rates and the emergence of highly capable companies that support drug development and manufacturing has led to a profusion of biotech startups. With many companies chasing the same targets using similar drug mechanisms, disintermediation is an ever-present risk for drugs in development and medicines already on the market. Vigilance around potential competitive threats is critical.
• Regulatory risk: The FDA drug review process is opaque. Not only is the agency privy to more efficacy and safety data than investors, but approval decisions also involve an element of human judgment. Funding cuts at the FDA and potential reforms to drug pricing have also created uncertainty.

However, even in challenging markets and uncertain times, the potential for asymmetric returns in biotech can be enticing.

“....the potential for asymmetric returns in biotech can be enticing.”

Midway through 2025, the S&P Biotechnology Select Industry Index had given up roughly 10% of its value over the trailing 12 months.² But below the surface, the top 10 performers on an absolute basis appreciated by an average of 145%. More than two-thirds of the companies in the index posted negative returns, with the bottom quintile of performers losing 67% of their value, on average.³

This performance dispersion has tended to become even more extreme over longer time frames as outlier companies turn their interesting science into an FDA-approved drug, a strong takeout offer, or the successful commercial launch of a new therapy. And these value‑creating events are independent of the macroeconomic or market backdrop.

Bottom Line: The largely binary outcomes for biotech companies create opportunity for stock pickers to add value by identifying the needle movers in the haystack—the outliers that are developing potential blockbuster drugs. Doing so requires a deep understanding of both the clinical and commercial prospects of a company’s drug development pipeline.