Current market challenges are redefining the biotech landscape

By Karen Harris

While the year started out as cautiously optimistic, stemming from the peak of biotech initial public offering (IPO) activity in November and several merger and acquisition (M&A) announcements at the JP Morgan conference in January, this optimism has dwindled due to ongoing dips in the major stock indexes, among other uncertainties.

Following an unpredictable first quarter, the biotech funding landscape continues to be in limbo with recent disruptions to the National Institutes of Health (NIH), expected changes to how the US Food and Drug Administration (FDA) evaluates new drugs for approval and increasing global competition for new drug development. These challenges within the biotech landscape extend to the Alzheimer’s field as markets do not embrace instability, leaving investors to take a cautious approach while waiting to see how the new administration’s recent policy changes and widespread funding cuts will affect the broader healthcare and biotech ecosystem, including the neurodegenerative disease space.

The uncertainty in the markets and future inflation cast doubt on the Federal Reserve’s (Fed) announcement on the two reductions in the Federal Funds interest rate for the remainder of the year. Ambiguity with interest rates will likely slow the pace of additional investment activity. The biotech market is extremely sensitive to this rate, making it critical to shape the sector’s investment performance. Alzheimer’s therapies are inherently risky investments, but lower interest rates may entice investors to move funds into more risky assets in search of a potentially higher return. Both the M&A and IPO markets are positively impacted in a low-rate environment as borrowing costs come down and investors increasingly turn to equities. Investors will closely monitor the timing and degree of any interest rate change as they evolve their 2025 strategy.

We expect to see continued M&A activity in the Alzheimer’s space with the growing ageing population and high prevalence of neurodegenerative diseases, creating an ever-growing demand for new treatments.

‘Existing drugs may become less accessible, more expensive or both, as tariffs could increase the chance of shortages’

The recent approvals of Leqembi and Kisunla are also key factors in persuading several pharma companies to either return to the neuroscience space or expand on their existing pipeline. Sales for these drugs will help inform additional M&As in the Alzheimer’s space throughout the remainder of 2025 and into 2026.

Consolidation among smaller biotech companies is needed, and the time is now, given current volatility and the lack of clarity related to venture capital (VC) or public market funding. Over 200 of the 700 publicly traded biotech companies are trading below their net asset value, and many are on the verge of bankruptcy, making it a prime time for M&As as valuations are coming down for small companies. Companies that still have cash, but failed products, are grappling with whether to liquidate and return the cash to investors, or continue with second or third assets, or consider a merger or reverse merger. The valuation of companies in the public markets right now is lower than those in the private markets, further enhancing the possibilities for consolidation.

We anticipate that the IPO market will remain stagnant throughout 2025, as evidenced by the first quarter (Q1). This year, there have been five IPOs compared to eight IPOs in Q1 last year. Of the five IPOs for 2025: Maze Therapeutics – genetic medicines; Ascentage Pharmaceuticals – cancer; Metsera – obesity; Sionna Therapeutics – cystic fibrosis and Aardvark Therapeutics – obesity) four are currently trading below the issue price.

The popularity of venture capital (VC) ‘mega rounds’ also accounts for a slower IPO market, as these rounds allow companies to delay IPOs. The poor performance of biotech companies in comparison to the broader market is another determining factor. The average annual return on Biotech XBI was a loss of 1.47% over the last five years versus the S&P 500, a market index, which is up 14.3% annually over the last five years. Currently, the only way to have profited in the biotech space is by selecting the ‘outperformers’ rather than investing in the broader biotech sector.

Of the last 20 biotech IPOs, 18 are trading below their offering price, and on average, stocks are down 49.8%. That means investors who invested in the last 20 biotech IPOs have, at least on paper, lost half of their initial investment.

Similar to 2024, we expect to see a ‘tale of two cities’ scenario where companies with well-known management teams and strong proof-of-concept data are receiving the lion’s share of funds, while continued uncertainty creates hesitancy among investors for companies in the investigational new drug application enabling and phase 2 stage of development, otherwise known ‘Valley of Death’. VCs have a record amount of capital to invest, but market volatility, underperformance of the biotech sector, a slower-than-expected reduction in interest rates and uncertainties associated with the new administration’s policy changes may slow the pace of private venture funding.

Venture firms and pharma companies are paying close attention to China’s fast-growing biotech industry. For example, approximately one-third of all pharma deals and partnerships in 2024 were with Chinese assets. Opportunities to invest or partner with companies with preclinical and clinical stage assets in China are gaining the attention of US investors and pharma, as there is the potential for a faster return on investment. Biotech companies in China can generally move more quickly from the preclinical stage to market than US-based companies, making their drug prospects more appealing to investors.

The expected tariffs being imposed on both pharmaceuticals and pharmaceutical ingredients will further disrupt the prospects of biotech investments and, therefore, the pace of drug discovery in the US. Existing drugs may become less accessible, more expensive or both, as tariffs could increase the chance of shortages and drug manufacturers would likely pass along the added cost to patients. Generic drug manufacturers may be unable to absorb the financial impact of tariffs and will choose to leave the market, adding to issues of accessibility and affordability that challenge many patients today.

With the market in flux, there is growing uncertainty in the biotech M&A, IPO and VC markets in the latter half of the year. We foresee continued interest and investment in the Alzheimer’s space from pharma companies based on recent successes, although decreases in federal funds supporting ongoing Alzheimer’s and neurodegenerative disease research will create a potential disruption to the pace of drug discovery and development that will ripple through the sector.

Despite current headwinds, the long-term upside for investing in biotech remains intact. The market is currently undervalued, leaving the door wide open for investors. An ageing global population creates a growing unmet need for Alzheimer’s treatments, and we believe pharma will remain invested until there are more treatments available. In turn, venture capitalists will get back in the game as the increased appetite from pharma should encourage the VCs to jump in and invest.

The biotech industry has proven itself to be resilient, surviving the financial crises of 2000 and 2008, and we anticipate it will survive these turbulent times as well. In the near term, the outlook is bleak for the biotech landscape, but the long-term outlook remains promising. 2025 will likely be a restructuring year for the sector. Stronger biotech companies will receive a larger share of the funding, while companies that may not have received funding in 2020 and 2021 will opt to restructure to preserve cash, merge or liquidate. But in the end, the biotech ecosystem will be stronger.

Regardless of external factors, the biotech market will continue to focus on unearthing new innovations and treatments for patients, creating a resilient industry. Scientific breakthroughs, technological innovations and game-changing advances in artificial intelligence (AI) will further advance and accelerate drug development efforts, establishing a robust and diversified pipeline that is key to future success. While we are in for a tough year ahead, we are hopeful and confident in the long-term outlook for the biotech and Alzheimer’s sectors.

Karen Harris is CFO and Head of Mission Related Investments at Alzheimer’s Drug Discovery Foundation (ADDF)