The biopharma outlook for 2025: Opportunities and challenges

With the Federal Reserve poised to implement interest rate cuts (albeit fewer than earlier forecasts assumed) and FTC leadership turnover anticipated, there may be broader shifts in how capital is both sourced and used in the biopharma industry.

These developments will impact where and how investors deploy capital, and how companies invest that capital into R&D and commercialisation, deal-making prospects, and overall sector performance.

Macroeconomic landscape: Rate cuts and sector impacts

Futures markets – as an analogue measure of consensus – imply two to three Fed rate cuts in 2025, fewer than previously expected due to persistent inflation, but potentially still meaningful to the sector. Historically, lower interest rates have encouraged investment by lowering borrowing costs and increasing incentive to invest versus preserve capital; the sector likely will benefit from both if rates fall meaningfully. This may not be a given at this juncture – persistent inflation has reduced prospects for rate cuts in general – but general consensus today is for multiple rate cuts in 2025.

Over the last three years, the industry has experienced headwinds due to elevated interest rates, even where signs of health have otherwise been difficult to sustain. For example, 2024’s biopharma IPO market began promisingly with $3.6 billion in total funding in Q1 – the highest in several years – but fell to $1.6 billion across Q2 and Q3 combined, as maintaining the momentum in the presence of relatively high rates proved more challenging than in low-rate boom years (e.g., 2014-2015 and 2020-2021).

Rate cuts could trigger greater capital flows across venture capital, institutional investors, and private equity – and in a more consistent fashion than since rates began to rise in early 2022. With falling rates reducing borrowing costs and increasing the need to deploy capital, investors may favour more aggressive capital deployment over conservative, inflation-hedged strategies.

R&D revival and commercial expansion

Growth in clinical trial activity and R&D investment is anticipated as capital becomes more accessible. Current clinical trial counts are at a five-year low, largely attributed to constrained funding post-COVID. Trial counts have fallen across both large and small companies, and across therapeutic categories (e.g., not just driven by a fall in COVID-specific trials). With declining borrowing costs, mid-to-large-cap companies are likely to reinvest in underdeveloped pipelines resulting from “pent up” demand over the period of higher borrowing costs.

Easing credit conditions will likely encourage companies to fund commercial expansion "at risk" via borrowing, rather than relying primarily or solely on operational cash flow to fund. Over the past few years, financial tightening forced companies to adopt leaner operational models, often curtailing investments in non-core geographies or opting for smaller commercial footprints (e.g., salesforce). With improved access to capital, firms may now seek to broaden their market presence and rekindle growth initiatives.

Deal-making and M&A: A gradual recovery

Deal-making, particularly in the form of mergers and acquisitions, has been subdued in recent years. The cumulative value of biopharma deals in 2024 is on track to hit its lowest level in over half a decade, exacerbated by high borrowing costs and historically high M&A premiums in the biopharma sector. So-called "mega deals" exceeding $15-$20 billion, which during the industry’s ascent fuelled much of the M&A sector from 2010-2020, have become scarce as borrowing costs have risen.

As borrowing constraints ease, the sector could witness a gradual rebound in M&A activity. Smaller and mid-sized deals may take precedence at first, as large-cap companies seek to address targeted pipeline gaps arising from looming patent cliffs and other shortfalls. We could eventually see some of the larger deals resume, though these may prove more challenging as both intrinsic values and M&A premiums have grown, compared to earlier periods where these deals happened with greater frequency (e.g., one per year as opposed to one every few years).

A shift in biotech dynamics: The return of "go-it-alone"

Over the past decade, biotechs have transitioned from focusing solely on innovation and early development to adopting a "go-it-alone" commercialisation model. This shift was driven by a low-interest-rate environment, smaller-scale development schemes (e.g., rare diseases), and reduced commercial footprint requirements. However, the rising interest rates of recent years have reversed this trend, with many biotechs opting to out-license assets or collaborate with larger firms. In many cases, development has altogether slowed or stopped as funding became harder to come by.

As capital costs decline, this dynamic may shift once again. Biotechs with promising pipelines, but constrained resources, could regain the confidence to commercialise independently, supported by increased investor appetite for risk and desire to maximise returns by retaining commercial rights.

Regulatory dynamics: FTC and the Inflation Reduction Act

Regulatory shifts add another layer of complexity to biopharma’s 2025 outlook. The Federal Trade Commission (FTC) is expected to undergo leadership changes, which may alter the regulatory environment for M&A. While the outgoing administration emphasised antitrust enforcement—impacting even smaller deals like Sanofi’s Pompe disease alliance that the FTC had ruled against —the incoming leadership may recalibrate these policies. Early indications suggest a continued focus on the technology sector (particularly focused on freedom of speech policy) and less focus on widespread antitrust cases. However, more commentary may be needed to clarify policy positions of the incoming administration.

Simultaneously, the Inflation Reduction Act (IRA) may compel companies to reevaluate their investment strategies – and where any gains from reduced borrowing costs / increased investment and more favourable FTC policy are counteracted by reduced cash flow from lead revenue generating programmes. While some drug pricing adjustments may effectively already be factored into existing payer contracts, the act’s broader implications remain uncertain as both companies and investors wait to see the full impact of negotiated prices on both top- and bottom-line.

Large-cap firms have begun adapting their development priorities, but its effects on early-stage investment and R&D funding could take years to fully materialise, particularly if decreased long-term financial outlook for higher potential programmes is weighed against near-term increased capital availability. Discussions surrounding the potential repeal or modification of the IRA with the incoming administration further complicate the regulatory picture.

Conclusion: Optimism with caution

Declining interest rates promise to unlock new growth avenues, from reinvigorated R&D efforts to growth in M&A activity. A change in FTC administration may shift policy away from the same antitrust focus over the last several years, though more may be needed to substantiate new leadership’s positions. However, changes may be rate limited if persistent inflation reduces the number of rate cuts, IRA reduces operating cash flow and perception of growth prospects per programme, and the pace of recovery is otherwise slow such that capital is not getting to companies who need it fast enough to avoid more harmful effects (e.g., biotechs going bankrupt that need capital short-term).