Biotech could be entering a broader re-rating as artificial intelligence and genomics accelerate drug discovery, while health care valuations remain at a significant discount to the broader market, according to David Song, MD, Ph.D., CFA and investment partner at Tema ETFs.
"Biotech is already in the middle of a re-rating that began with improvements on the health care policy front," Song said. "Innovation in the sector remains robust, while the need for M&A from big pharma is quite apparent."
He said continued innovation, AI’s role as a catalyst and further policy accommodation could support a broader "regime change."
The outlook comes after positive Phase 3 results from Merck and Moderna for a personalized mRNA cancer vaccine, reigniting interest in the convergence of AI, genomics and drug development.
"AI and genomics could improve the development of personalized cancer vaccines," Song said. "I’m optimistic, but the opportunity could be quite large, particularly if paired with earlier cancer detection."
The opportunity could extend well beyond drugmakers. "The initial beneficiaries will be the biopharma pioneers, alongside AI platforms and life sciences tools companies, including genomics companies," Song said.
AI’s Role in Drug Development
Song cautioned that AI is unlikely to immediately replace the traditional blockbuster-drug model.
"For the most part, the blockbuster drug model will remain dominant for the foreseeable future," he said, pointing to the need for late-stage randomized clinical trials.
Instead, AI’s initial impact could come through efficiency gains in drug and diagnostic development and eventually higher probabilities of success.
"AI is important in the economics of precision medicine," Song said. Demonstrated successes from established companies and AI-first startups will help determine how integral the technology becomes to R&D.
For the emerging ecosystem, Song sees genomics and life sciences tools companies as potential "picks and shovels." He pointed to Personalis, whose technology was used in the Moderna-Merck vaccine, alongside companies involved in mutation identification, testing and manufacturing.
CANC’s Broader Healthcare Bet
The theme is also playing into investor interest in Tema Oncology ETF (NASDAQ:CANC), which has surpassed $200 million in assets.
"I think we’ve seen evidence that investors are strategic, and that a pure biotech fund does not capture the diversity of innovation seen in oncology today," Song said.
He said CANC’s thesis goes beyond cancer vaccines, encompassing innovation across therapeutics and diagnostics. "We take a bottom-up approach, company by company, in constructing a portfolio that provides the highest likelihood of massively improving human health, at reasonable valuations."
That diversification could be important because Song does not expect one cancer-treatment technology to dominate the industry.
"Because of the competing modalities and the heterogeneous nature of human diseases, we don’t expect a power law dynamic," he said, pointing to the rise of antibody-drug conjugates after initial enthusiasm around PD-1 drugs.
Song also cautioned against reading too much into a single vaccine breakthrough, noting the subsequent BioNTech/Roche setback in colorectal cancer.
"mRNA vaccines have shown promise, but biology and immunology remain highly complex, with competing modalities," he said. "There will be successes but also bumps along the way."
Still, Song sees a broader AI opportunity that investors may be underestimating.
"Personalized vaccines are only one facet of AI drug discovery and AI genomics," he said, pointing to previously undruggable targets, best-in-class drug discovery and AI applications in health care delivery.
"Applications in health care and biotech are to a large extent still not priced into the health care sector, which remains at a large discount to the market multiple currently," Song said.
"Regardless of what happens in semiconductors or Nvidia or the general economy, we see progress accelerating and valuations not reflective of that progress in health care."
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