Motley Fool Hidden Gems Investing - Has Biotech Met Its Moment?

Starting point is 00:00:00 Tim Beyers. Is it time to buy biotech? You're listening to Motley Fool Money. Fools, welcome to Motley Fool Money for Monday, July 21st, 2025. I'm your host, Tim Beyers. With me, Carl Thiel from the Rule Breakers team. Welcome to your Rule Breakers podcast. Carl, how are you feeling this morning? Ready to talk biotech? Caffeinated, I hope? Absolutely. I'm plenty caffeinated. Plenty caffeinated. I can't ever be too caffeinated. We want to bring this up because we have recent data from LARCA that the total VC funding in biotech increased year over year for the first time since 2021 this is last year reaching 21.4 billion um versus uh 16.1 billion

Starting point is 00:00:59 in 2023 that was a significant increase now that surpassed pre-pandemic levels furthermore 2024 recorded the strongest quarter since early 2022 this has seemed to continue carl like 2024 we ended really strong. But then just recently, the Narcan maker, which is kind of an anti-narcotic, I don't really know how to describe it here, but a company named Anthea raised $56 million in Series C capital. And we also have some data that family offices are committing in bigger amounts to biotech and early stage biotech. So here's my question for you, Carl, before we get into the opportunity in biotech. How are you feeling about this? The private market seems to like biotech more than it has in a while. Is that something we can look forward to as public market

Starting point is 00:01:55 biotech investors? I guess my overall feeling, and this may come through a few different ways and to a lot of things we talk about today, it's guarded optimism with lots of caveats, basically. I'm glad to see venture capital. I have to say, to me, when you look at it, it's more like it's stabilizing than that I really see a lot of things going up. I mean, if you look ahead of the 2024 data, the second quarter of this year looks like it's actually going to come in at a five-quarter low. It dropped back down again. I'm not terribly worried about that. I mean, I, I, what, but I, I think what you're seeing is this stabilization and this kind of, uh, waiting, but you brought up, um, family office, uh, family offices. And that's, that's a really interesting. And for people who,

Starting point is 00:02:58 who don't know, I mean, these, these are sort of, you know, very wealthy private investors, right. Who are, or, or who get, you know, they, they tend to, um, I would say that in the past family offices have been, um, they've often been passion projects when they invest in the sector, you know, maybe somebody in the family had a particular disease and they want to put money into that disease, something like that. These days they're, they're the, the investments are getting bigger and they are often, uh, different family offices are working together, or sometimes they're working with a general partner. I feel that they're sort of stepping into the void because they have even longer timelines than a traditional VC. Their timelines are as long as

Starting point is 00:03:45 they want them to be. They're kind of stepping into the void to take care of some of the really early seed stuff. And Anthea is a really interesting company. Eric Schmidt from Google is involved in that one. But that's a fascinating company and just the perfect kind of thing for a family office to be involved in. Yeah. I mean, this is super interesting. Let's pivot to the opportunity because, again, we said that biotech has been really hit or miss. It's a big part of the Motley Fool Rule Breakers scorecard, has been just short of forever, really since the beginning of the service over 20 years ago. I want to talk about this because it has been hit or miss. We've twice recommended the XBI, which is a biotech-themed ETF. Both

Starting point is 00:04:35 positions have lost to the market by 35% and 60% as our recording. Why is now a more interesting time. In addition to all of this activity in the private market, and we're starting to see more IPOs, why is now an interesting time for you as a biotech investor? What should get the public market investors more excited about this? Yeah. Well, I think our XBI positions are sort of reflective of what's going on in the broader market, which is that in absolute terms, those positions aren't down sharply. I think last night one of them was actually- No, they're just losing to the market, right? They're just losing to the market, right? And that's kind of exactly what you're seeing,

Starting point is 00:05:23 which is, as with the VC funding, biotech's kind of moving sideways right now. And for a while, the markets were moving sharply higher. There's been some more volatility around that. But the question, why is this a good time to be investing in biotech? I think, you know, let me first briefly say why everything continues to be so negative. You know, the reasons to be negative before were high interest rates, lack of M&A, you know, this sort of overdraft of companies that came public when they shouldn't have early on that the market was still digesting and just the slop that needed to get out of the system. Some of those are getting a little bit better. We actually have seen some really

Starting point is 00:06:11 interesting M&A this year, a lot of multi-billion dollar deals, and that's super bullish. But at the same time, some of those are still in place. And then we've got a new collection of worries around what's going on at the FDA and how are they going to regulate things and what's going on with pricing and the political environment. All those things are still hanging over the sector. So, you know, to be a real bull right now, you do have to be a little bit contrarian and, you know, kind of look at a wall of worry that you think this market can climb. I mean, there's still plenty of reasons to be cautious that you can point out. And to the XBI in particular, I guess the reason I've been a little less personally sort of focused on the XBI, I mean,

Starting point is 00:06:55 it is a proxy for the whole sector that people, you know, that's sort of the commonly used tool to say, how is biotech doing? Let's look at the XBI. But it's a very broad index. It's got this kind of equal weighting formula so that it's getting rebalanced all the time and doesn't favor the large cap companies. I think it's a better time, honestly, for taking very careful picks within the sector rather than just broad market exposure. The broad market exposure pays off when things finally turn around. And I do think that happens, uh, eventually, but I think, you know, you can maybe do better, uh, picking carefully individual companies that, that can not only get a sort of general industry lift, but also have, you know, some of their own specific

Starting point is 00:07:47 things going on that are underappreciated. There, there's two things I've heard you say to me about when you're talking about biotechs that you want to maybe focus in on that might be an interesting play, like ones that we want to add to the Rule Breaker scorecard, for example. Two things that I have heard from you. One is, if the science is really good and the capital that the company has is good enough, that's a company that's giving itself a runway to maybe get to scale and develop a blockbuster drug. That may be a worthwhile risk. So that's one i've heard you talk about the other is when there's enough there there that the vulture that could come along and acquire this company at a premium you know might be salivating a little bit

Starting point is 00:08:42 more and those those two things sort of create the conditions for really good potential biotech returns do you think we're seeing more of those types of situations right now i think you're seeing a situation in terms of buying out companies in which big pharma has been a little bit sitting on the sidelines, but they can't really afford to keep doing that. And so there's companies like Merck has been sort of very open about that they are out shopping, the wallet is open. They are looking around. They can't put off forever filling in pipelines. There is a lot of big, big patent cliff situations going on at most of the big pharma companies. And a patent cliff meaning like a drug that is under patent, but going to be forced to become

Starting point is 00:09:37 generic. Exactly. So you see companies that have 20, 30, 40, 60% of their revenue is going to you know, essentially open up to generic competition and largely disappear over the next few years. Yeah. It's a big deal. So, so that's one thing, but I guess the other thing I'd say into what you just said is, you know, do they have the science and do they have the cash? Yes. I would add to that right now. I think you have to be even more picky, which is, do they have the science? Do they have the cash? And are they pretty close to market right now? um you know having having great science through to approval almost right you've got to see a you've got to see a through line i i just think there's enough opportunities like that that you

Starting point is 00:10:24 don't need to play the hero with with earlier stage uh science i mean there's obviously there's going to be some great payoffs there but like risk adjusted i i feel like there are a lot of very late stage companies that are that are near market on the market or even on the market and already seeing sharp sales ramps that you can kind of more focus there fair enough all right we're going to talk about two of them up next which is the better biotech viking or eli lily we're going to battle it out next you've got to try breakfast And what better way than with a delicious Pret Organic Coffee, starting at just $1 all day, every day, now until December 31st.

Starting point is 00:11:19 At participating A&W locations in Ontario. All right, Carl, let's talk about two companies that you mentioned not playing the hero, you know, companies that have drugs that are either on the market or very, very close to on the market. And we've got a mixture of both, you know, on the market, Eli Lilly has done exceptionally well with weight loss drugs. Munjaro and Zepbound, they are the strong rivals to one that Fools, you certainly have heard of called Ozempic. But Viking has a late stage drug, actually more than one late stage drug that is interesting and competing in this space. Carl, break it down for us here. When you look at these two, give me one advantage and one

Starting point is 00:12:13 disadvantage of each? Or if you want to, just tell me, which of these two do you favor? Look, if you're oriented towards, you know, safety and stability, Lilly is plainly the better company to go with here. I mean, they're not only winning in the marketplace. I mean, you know, Mongero and Zetbound have surpassed Ozempic. They also have a tremendous follow-on pipeline. I mean, when you look at who are developing the best next generation sort of GLP and related drugs, often they're more than one mechanism. It's GLP plus other mechanisms. Lilly is not necessarily at the top in every category, but they're always near the top. they've really done a great, great job in this area. Not to mention the fact that they are a

Starting point is 00:13:08 diverse pharmaceutical company with, you know, lots of other things going on in other areas. That said, you know, right now the market is essentially a duopoly between Lilly and Novo Nordisk and, you know, largely about two products, even though there's a few brand name floating around that's really just two compounds, terzepatide and semaglutide. That is not always going to be this way uh and the the discontinuation rates of these drugs uh over like a one and two year period is is horrific i mean people just you know they're not staying on them which tells you something about the the sort of long-term uh wear of the side effects of these drugs so there's a lot of room for improvement and there's a lot of companies vying to do it uh i think viking is a

Starting point is 00:13:55 super interesting pick in the space i will say you know when i talk about companies that are sort of like on the verge of of going to market this is not one of them they've got a lot of work ahead of them uh they are they are late stage uh they are late stage they began their phase three in their um in their injectable formulation of their drug their oral drug is a little bit farther behind um you know we'll see data in the next uh in the next couple of years but um you know it still remains to me a relatively speculative bet that said it's one where you know if you're looking for maximum returns i mean viking is tiny tiny tiny compared to uh lily could see absolutely massive returns um and this would be one that to me you would slot in as a as a

Starting point is 00:14:47 speculative bet in a in a larger portfolio i mean and we sometimes like that in rule breakers let me put you on the spot here and say of these two actually before i put you on the spot here do you think that viking is a pretty good m&a candidate does it fit into that theme of biotechs that are really producing good science have the cash very attractive somebody to come in and swoop this one up oh it absolutely is i mean there's been a tremendous amount of of MNA in the sector. I mean, specifically around the obesity space. I mean, companies have been snapped up. Um, and you, when you look at large pharma that have great needs in the area, like Pfizer, for instance, needs products, their own obesity programs flamed out, you know, you would,

Starting point is 00:15:37 you would think, uh, they would certainly be in the market to be buying. Uh, um, and they're not the only ones that said Viking has not shown much interest in being acquired so far. So I, I'm sure these, uh, these conversations are taking place, but, um, you know, and so, so I assume that Viking is driving a very, very hard bargain. They, they do have really good data to date. It's, it's, it's early data. So, you know, I don't want to overestimate it, but it's, it's really good. Um, I think they're very confident in the product and they are a little bit farther ahead than most people. So I think, uh, they're going to ask for a big price tag. Who are you going with then so are you going with viking are you going with lily so outperforming over the next

Starting point is 00:16:20 five years who you got so outperforming um yeah i will go with viking just because i mean if they hit with this there there's you know there's no way lily is going to be able to yeah to you know lily is not they hit it's a monster quintuple right right right exactly um but it is certainly way, way riskier. Yeah, I'm going with Viking as well. This is a classic rule breaker. If it hits, it will be a massive multibagger. So Viking Therapeutics, the ticker is VKTX. All right, up next, a little trivia. Get your notepad ready and let us know in the comments what company is generally considered history's first biotech. We're coming back with that next. In Toronto, every arrival is a statement, and nothing says it better than this.

Starting point is 00:17:13 Cadillac Optic was the number one selling luxury EV in Canada for 2025. Find your rhythm across a seamless 33-inch display and an immersive 19-speaker AKG surround audio system. This city demands agility, and Optic delivers with precision to make every drive extraordinary. Let's take the Cadillac. Find out more at cadillaccanada.ca. Luxury sales claim based on S&P Global Mobility Canadian New Vehicle Total Registrations for calendar year 2025 for the Cadillac definition of luxury. All right, Carl.

Starting point is 00:17:41 So as always, I like to end these with a little bit of trivia, a little bit of history, try to help members understand a little bit more about the market we're talking about. In this case, we've been talking about the biotech market. I'm super curious of your answer here. And I've got a little bit of detail that we'll talk about after I get your answer. but Fools, go ahead and give your answer in the comments. What company is generally considered history's first biotech? Carl, what is your answer on this? I am really interested to hear what you say. Well, I'm interested to hear what you're going to say. I think there's only two possible

Starting point is 00:18:18 answers here. I'm pretty clear on which it is. You could argue that it's Genentech, but I think it's pretty clearly Cetus Corp. Okay. Very interesting. So, we need to hear more about Cetus Corp because when I put this to Gemini, Gemini said, and I'm quoting here, while biotechnology broadly defined as roots in ancient practices like brewing and fermentation, the birth of the modern biotech industry focused on genetic engineering is generally associated with the founding of Genentech. It was founded in 1976 by Herbert Boyer and venture capitalist Robert Swanson. So tell me more about Cetus. Yeah. So Genentech, the argument for that is that they were specifically founded to take care, uh, to, to take advantage of, uh, you sort of

Starting point is 00:19:07 recombinant, um, DNA techniques to make proteins that you, uh, you know, you couldn't manufacture otherwise. Cetus Corp was founded five years before that in 1971. Yeah. And it was, it was basically a microbiology company um that was set up you know initially what they were doing was more sort of industrial making enzymes and stuff but they became a biotech giant um one of their products is still on the market today proleukin um and they are the ones who developed pcr specifically carrie mullis at cdiscorp uh who i got to interview once nobel laureate um developed the polymerase chain reaction, which is the DNA amplification technique that is still core today for most gene sequencing. And if nothing else, I think that cements them as the first company.

Starting point is 00:20:04 So, interestingly enough, Gemini did mention Cetus, but it mentioned Cetus as the runner-up. I was super curious about this, because I think I've told you this, even though I've learned more about biotech from you than anybody else. My grandfather was a research doctor at Squibb back in the 1950s and 1960s. I have thought, not that Squibb would be the first biotech, but it would be like, well, surely this goes back to the 1930s or 1940s, but nope, it's the 1970s. This is still a relatively new industry. If you want to count see this, we're 54 years into the industry. That makes us a fairly young industry. Absolutely. Yeah. And, you know, a lot of the, some of the pioneers are still around. There

Starting point is 00:20:58 are companies, I mean, I was just looking, Sarepta, SRPT is in the news a lot right now, not for good reasons, but for interesting reasons. But I mean, that's another, that's just an example of a company that its original DNA goes back to 1980, right? There's a lot. Biogen goes back to 1970. I mean, a lot of these first-generation companies are still what's cooking today. And still cooking and still going. All right, Carl, thanks for being here. Thanks for talking biotech. Appreciate that. Fools, as always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content

Starting point is 00:21:50 follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content provided for informational purposes only. To see our full advertising disclosure, please check our show notes. For our engineer, Dan Boyd, for our producer, Anand Chakabaloo. For Carl Teal, I'm Tim Byers. Fools, thank you for tuning in. See you again tomorrow. Fool on!

Motley Fool Hidden Gems Investing - Has Biotech Met Its Moment?

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.