2021 was a difficult year for biotech equities, with the Nasdaq Biotechnology Index giving a full year performance of -0.6% and a total return of 0%, underperforming the S&P 500 benchmark by more than 25 percentage points. It was one of the worst years for the index.
As of 20 January, the Nasdaq Health Care Index was down 23.9% compared to 12 months prior.
The industry experienced a lot of volatility throughout last year. Funds such as the L&G Healthcare Breakthrough UCITS ETF finished the year down 8.32%, while BB Biotech reported a net loss of CHF 405m (£327.3m).
But biotech investors and analysts are looking to the new year with optimism. Investment in the sector, after all, is about long-term potential - and performance.
Despite a boom in investment, catalysed by the pandemic, Covid-19 slowed growth for biotech and healthcare companies that are not Covid-focused, according to Howie Li, head of ETFs at Legal & General Investment Management.
Nevertheless, the money kept flooding in. Data from Morningstar shows that open-ended funds and ETFs investing in healthcare stocks saw 26 months of consecutive inflows through to November 2021. As of the end of the month, total net assets were at more than €83bn.
After solid inflows since April 2020 - which saw a flood of investment following the declaration of a pandemic in March - fortunes waned for biotech equity funds, which saw three months of outflows from September 2021.
Still, as of November end, total net assets in European biotech funds stood at over €14bn.
Li said: "We tend to focus on a lot of high growth healthcare stocks, where there is a connection to technology, and you see some pressure there in the short-term.
"That is not to say there are not good performers out there... We have seen a strong bounce back in other [healthcare] industries, outside of biotech."
On a relative basis, healthcare and biotech may have been a laggard in the second half of 2021, but this is where diversification is, as always, crucial.
Li highlighted that strong performance in companies like Vertex Pharmaceuticals which gained 21% for the year is offset by firms like Silab which was down 40%.
He said: "When it comes to thematic investing, we are targeting a structural change in the future, targeting that kind of early diagnosis.
"And there will be some volatility in the companies and there will be some companies that do well, and others companies that might see some pressure in the meantime.
"However, it is about tracking that kind of conviction that we all have, that healthcare breakthroughs and bio pharma breakthroughs are what will deliver that change and that kind of performance return."
According to research by Renaissance Capital, there were nearly 400 IPOs priced for the biotech market in 2021, raising $142.5bn of capital and contnuing the momentum seen in recent years.
Meanwhile, venture capital funding for healthcare-related AI firms increased ten times between 2014 to 2021 from $600m to $6.6bn, according to data from ROBO Global, PitchBook, Crunchbase and KPMG.
Karen Andersen, stock analyst at Morningstar, said: "It has just been off the charts since the pandemic started."
Treatment for rare diseases is also set to soar. According to data from EvaluatePharma, worldwide orphan drug sales continue to grow and are forecast to be at $255bn by 2026, more than doubling since 2020.
In a recent update, BB Biotech highlighted an ongoing challenging environment for biotech in particular.
Nevertheless, it anticpates that the industry will "continue to deliver significant progress" for more established mid-cap firms, as well as early stage companies.
Dallas Webb, portfolio manager at BB Biotech, said: "We are seeing breakthrough innovation on many fronts. While we did see some clinical setbacks, we also witnessed true progress.
"Genetic medicines, targeted oncology, and progress in the central nervous system (CNS) space are truly encouraging."
He added: "As with all sectors, biotech certainly has its own risks. Covid remains an overhang for all markets, it is the new norm.
"As for biotech, drug pricing discussions have also become a norm and will likely populate headlines around election cycles. M&A has also been somewhat quiet in the sector but we expect to see more deals taking place as biotech pipelines mature."
Meanwhile, themes such as the decentralisation and democratisation of healthcare - particularly when it comes to diagnostics - continue to be an interesting space.
Nina Deka, senior research analyst at ROBO Global, said: "This already began before the pandemic where we saw people saying, ‘look, we can do things remotely', but it just was not taking off.
"And then with the pandemic, this decentralisation, this getting care outside of the four walls of the hospital, really started to take hold.
"There was a very accelerated uptick in adoption for telehealth telemedicine services that is here to stay, that is not going anywhere."
Regarding the outlook, LGIM's Li said people will be looking at the healthcare industry "with a pandemic lens, people are going to struggle to look beyond that".
He added: "In the near-term, certainly in 2022, people are still going to be looking at the pressure hospitals and healthcare staff are facing.
"That push towards technology and cost reduction is going to be very key in that outlook. We continue to expect investments to go up in that area."
There may also be more investment targeting some of the technologies that have already been developed, while fields such as spatial biology are forecast to grow, with 2022 potentially being an "inflection" year for the sector.
Li explained: "This is really down to deeper cell level understanding of diseases and their treatments. So again, that area of gene sequencing and gene therapy, that is certainly going to be a very interesting area for 2022."
For BB Biotech's Webb, weakness in the sector has created some very attractive valuation levels representing good buying opportunities.
He said: "We have been adding to positions where we have strong conviction that near term potential catalysts can generate positive momentum."