Biotech might be on the verge of something bigger than a typical market bounce. According to Dr. David Song, an investment partner at Tema ETFs, the sector is already in the middle of a re-rating, and the forces behind it could have legs.
"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."
Song, who holds an MD and PhD, sees continued innovation, AI's catalytic role, and further policy accommodation as potential fuel for a broader "regime change." This isn't just about a few hot stocks; it's about a shift in how the market values an entire sector that's been trading at a significant discount to the broader market.
The timing feels right. Recent positive Phase 3 results from Merck and Moderna on a personalized mRNA cancer vaccine have reignited interest in the convergence of AI, genomics, and drug development. It's a tangible sign that the hype around these technologies might be turning into real-world results.
"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."
And the opportunity isn't just for drugmakers. "The initial beneficiaries will be the biopharma pioneers, alongside AI platforms and life sciences tools companies, including genomics companies," Song explained.
AI's Role in Drug Development
But let's pump the brakes a bit. Song is quick to caution that AI isn't about to upend the traditional blockbuster-drug model overnight.
"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. Those trials are expensive, time-consuming, and not something AI can just wave a magic wand at.
Instead, AI's initial impact will likely come through efficiency gains in drug and diagnostic development, and eventually, higher probabilities of success. It's about making the existing system work better, not replacing it.
"AI is important in the economics of precision medicine," Song said. The real test will be demonstrated successes from both established companies and AI-first startups. That's what will determine how integral AI becomes to R&D.
For the emerging ecosystem, Song sees genomics and life sciences tools companies as the "picks and shovels" of this new gold rush. He specifically pointed to Personalis, whose technology was used in the Moderna-Merck vaccine, as well as companies involved in mutation identification, testing, and manufacturing.
CANC's Broader Healthcare Bet
This theme is playing out in the market through products like the Tema Oncology ETF (CANC), which has quietly surpassed $200 million in assets. That's a sign that investors are getting strategic about how they play the oncology space.
"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.
CANC's thesis goes beyond just cancer vaccines. It's about capturing 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," Song explained.
That diversification is key, because Song doesn't expect any single 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, noting how antibody-drug conjugates rose to prominence after the initial enthusiasm around PD-1 drugs.
He also cautioned against reading too much into any single vaccine breakthrough, pointing to the recent setback for BioNTech and Roche in colorectal cancer as a reminder that science is messy.
"mRNA vaccines have shown promise, but biology and immunology remain highly complex, with competing modalities," Song said. "There will be successes but also bumps along the way."
Still, Song believes the broader AI opportunity in health care is something investors might 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.
Here's the kicker: "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.
In other words, the market might be so focused on AI's impact on tech giants like Nvidia that it's missing the potentially bigger story in health care. "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."
That's a bold claim, but if AI and genomics really are on the cusp of transforming drug development, the sector's current discount might not last much longer.
