Biotech Seeks Turnaround as Investors Focus on Fundamentals

Biotech and pharmaceutical companies are navigating a turbulent market in 2025, with macroeconomic uncertainty, high interest rates and shifting regulatory policies weighing on the sector, according to Ernst & Young’s (EY) latest Biotech Beyond Borders report, which was the subject of a panel discussion at the BIO International Convention last week.

The panel, titled “35th Biotech Beyond Borders Report: Are Capital Markets Finally Coming Back?” included speakers Ryan MacDonald, Vice President, Corporate Development, Bristol Myers Squibb; Marian Nakada, PhD, VP Venture Investments Johnson & Johnson Innovation – JJDC; Paris Panayiotopoulos, Senior Managing Director, Blackstone Life Sciences Group; and Greg Verdine, PhD, President, Chief Executive Officer, and Board Member, LifeMine Therapeutics.

While policy uncertainty and capital scarcity have slowed deal-making, core science and innovation remain robust, noted Arda Ural, PhD, Americas Life Sciences Sector Leader, EY, who moderated the discussion.

The overall findings of the EY report echo the sentiments from Cure’s recently published CEO survey, “The Future of Healthcare Innovation 2025,” which found 87 percent remain optimistic about the future of healthcare innovation, despite both political and technological changes bringing disruption and new opportunities.

Challenging Environment for Biotech Investment and Dealmaking

The EY report shows biotech companies are facing tough conditions and must get back to basics, focusing on managing their cash carefully, preparing for shifts in drug pricing rules and tariffs, and planning for limited access to capital as IPOs and funding remain scarce. Companies are also weighing how global supply chain risks and political tensions could reshape partnerships and where drugs get made.

Mergers and acquisitions (M&A) between pharma and biotech dipped again in 2024, with just 54 deals totaling $77 billion, down 50 percent from 2023. IPO activity has improved from recent lows, but with only 30 initial public offerings raising $4 billion, the market remains below historical averages.

The market has become, according to the panelists, one in which even well-regarded companies are finding it hard to secure follow-on financing, with many trading below cash value and a growing number returning capital to investors rather than seeking risky mergers.

These factors have made scenario planning, cash efficiency and portfolio optimization top priorities for leadership teams, according to the panelists.

Venture Capital and Alternative Funding for Biotech Adjust to New Realities

Venture capital (VC) fundraising, especially for early-stage rounds, rebounded to $15.5 billion in 2024, approaching 2021’s boom year. But panelists noted VC is now skewed toward larger rounds for fewer companies, favoring startups with compelling scientific evidence and experienced management.

With traditional sources drying up, more biotechs are turning to royalty deals, now valued at $14 billion and growing at a 45 percent compound annual rate, as investors seek returns less tied to market volatility.

Verdine said that “there is a retreat to caution,” and suggested that large pharma may need to step in to bridge gaps left by federal cutbacks. Some big drugmakers are moving earlier in the investment cycle and providing resources to help startups reach key inflection points.[M2] [RF3]

Policy and Global Dynamics Add Complexity to Biotech Deals

New policy proposals and regulatory changes, ranging from drug pricing reforms to tariffs, are shaping the biotech sector[M4] . The report notes looming “Most Favored Nations” pricing, tariffs, and ongoing debate over the Inflation Reduction Act’s impact on innovation (see: “Trump’s Drug Pricing Executive Order Splits Biopharma Leaders.”)

These shifts may restrict deals across geographic boundaries and complicate how companies bring new drugs to market, especially for smaller biotechs.

A “severe constriction of geographic deals” [M5] could result with some companies opting out of certain markets due to pricing controls, Verdine said. Other panelists cited the growing complexity of navigating both U.S. and foreign regulatory environments.

China, however, remains a rare growing market, with $31.5 billion in alliances reported for 2024 and the country emerging as a key partner for R&D and clinical development, even as political and IP concerns persist.

Biotech Innovation Remains Strong

Despite market and policy turbulence, innovation remains healthy. U.S. and European public biotech revenues climbed 6.8 percent in 2024 to $205.4 billion, and the number of active assets in development grew steadily.

Panelists cited ongoing breakthroughs in oncology, neurodegeneration and immunology, as well as advances in modalities like CAR-T therapies, radioconjugates and allele-specific gene editing.

Artificial intelligence is playing a larger role, with 87 percent of recent alliance investment directed at AI-enabled drug discovery platforms. Panelists described this as “a golden age” for pursuing previously intractable diseases, with AI promising to shrink the time from concept to clinical proof-of-concept and enabling more targeted, efficient research.

Biotech Outlook: Focus on Fundamentals

Looking ahead, the report suggests the biotech industry is entering an era of “haves and have-nots.” Companies with mature pipelines, clear clinical milestones and strong leadership are best positioned to weather volatility. As public and private funding diverges, the industry may see more companies seeking external partnerships, licensing deals or strategic M&A to drive growth.

Most panelists agreed the IPO window will remain mostly closed in the near term, with M&A serving as a primary catalyst for both company formation and liquidity.

“There’s only one area that we can be relatively certain about, and it’s M&A — not only will it continue at the pace that it’s at, but it could pick up substantially,” Verdine said. “That might be enough to give us a bit of a lift.”

Read the full EY Biotech Beyond Borders report here.