The Biotech Pipeline depends on a continuous flow of capital from Venture Capital (VC) firms to commercial Pharmaceutical Companies; however, overcapitalization during 2020–2021 inflated Initial Public Offering (IPO) valuations and disrupted traditional acquisition pathways.
Elevated Interest Rates driven by central bank policies forced Big Pharma and institutional investors toward lower-risk, derisked assets, concentrating Mergers & Acquisitions (M&A) into Phase II and late-stage clinical programs rather than early Series A rounds.
Antibody-Drug Conjugates (ADCs) represent one of the most resilient market niches, recovering faster from the 2022–2023 downturn with major acquisition deals, including high-value transactions involving Pfizer, Seagen, Daiichi Sankyo, and Merck.
The PwC Pharma Index underperformed compared to broader market indices like the S&P 500 in 2024, prompting therapeutic developers to turn to Venture Debt and leverage Artificial Intelligence (AI) to streamline R&D timelines and pipeline optimization.
1 Funding Ups and Downs
1.1 In early 2024, we received many questions regarding the funding outlook for biotech. The following is our answer to these questions. Most readers in Q1/Q2 2024 are well aware that 2023 was a rough year for biotech funding. Before we discuss the 2024–2025 funding outlook, it is instructive to review how we got here. The following discussion is a compilation of analyst reports from 2020–2023 from Silicon Valley Bank and PitchBook.
1.2 With the full onset of the COVID-19 pandemic in 2020, the promise and potential of biotechnology was front and center in the global conversation. The sudden spotlight, combined with interest rates near 0%, drew record amounts of capital and record new investors (who PitchBook delightfully dubbed “tourist investors”) from many industries into both the private and public biotech sectors.(1)(2) The first dramatic impact of biotech investing was seen in the public markets, where biotech stocks rose quickly to new records, even as the rest of the world was experiencing an economic shutdown.(3) At the same time, some late-stage biotech companies that were previously planning acquisitions by big pharma found they could achieve a higher exit on the public market or an earlier exit with less data.(4)(5) Hence 2020 saw the largest number and value of biotech IPOs in history. During this time, a large influx of private investment drew record total dollars, total investments, and high valuations over 2020–2021.(4) From the hindsight perspective of an observer in early 2024, many of these investments were overvalued and overfunded for the quality of data and stage of the company.
1.3 Fast-forward to the beginning of 2022 when the IPO class of 2020 began running short of cash and their market caps began to fall.(3) In May 2022, PitchBook’s venture capital (VC) initial public offering (IPO) index indicated the recently IPO’d firms were 75% below their 52-week high, which further supports the suggestion that the firms went to the public markets on inflated valuations.(6) By this time, many big pharma companies had accumulated a windfall of capital from COVID-19 vaccine sales, among other pandemic-related anomalies. As they watched the valuation of technology that they missed acquiring in 2020 come down, big pharma sensed an opportune time to buy. The period 2022–2023 was a singular time in biotech investing: pharma had record capital available for acquisitions, yet total acquisition spending was at its lowest in several years.(4)
1.4 The life cycle of a biotech firm is fed by venture and private equity investment dollars. When pharma paused acquisitions, the late-stage companies (often phase I–II, Series C) who were planning an exit in 2022–2023 now found themselves without a buyer. Their investors suddenly needed to reallocate their capital to plan for additional unplanned rounds and began holding off on investments into new portfolio companies. The follow-on effect was a shortage of funding into midstage companies, especially Series B rounds that were intended to fund first-in-human manufacturing batches, investigational new drug (IND) application–enabling studies, and some small phase I trials. This first real crunch of investment dollars was felt most heavily starting in the second half of 2022, when total deals began to slow. By Q2 2023, the $55 billion overcapitalization of 2021 had turned into a deficit, and the portion of downrounds spiked to 15%, most heavily occurring in later-stage companies.(1)
1.5 For a time in 2023, Seed and Series A firms that were raising their first funding rounds saw valuations and total funding dollars hold steady, as investors into this stage are more often high-net-worth individuals or smaller venture funds that count a large number of such individuals among their limited partners (LPs). This kept the pipeline of new firms flowing temporarily, only to be halted as this class of firms needed institutional funding for Series B to continue development. The 2020–2021 spike in investments also exhausted the capital sources of this pool of LPs for funding in 2022–2023.(1) The good news, however, is that as of Q1 2024, Seed and Pre-Seed valuations are holding steady, if not up from 2021.(2)
1.6 Parallel to this series of unfortunate events, interest rates climbed to levels not seen since the 2008 financial meltdown.](7) High interest rates typically reduce venture investing and this trend was confirmed in 2023. While high interest rates exacerbated the factors depressing later-stage funding, it also created fresh pressure on the early-stage companies that initially looked to be spared the brunt of the downturn. While 2023 saw Seed/Series A valuations hold steady, the total number of deals was low.(4) One serial biotech entrepreneur looking to raise the first institutional round for her fifth start-up said this was the hardest time she’s ever had fundraising — including her time raising money during the 2008 financial crisis.
1.7 The depressed funding into biotech start-ups led to depressed spending on discovery services, contract research, outsourced testing, and manufacturing services. While larger, more established firms had capital to weather the downturn, smaller service providers needed to look to loans, venture debt, or other financial resources. As a result, 2023 saw the largest round of venture debt into service providers and therapeutic drug/device start-ups ever recorded.(8) Therapeutic device and drug companies shed pipelines and assets in an effort to conserve cash. One large biotech venture firm described this effect as “trimming the fat.”(9)
1.8 So where do we stand, and what is the outlook for 2024? Analysts consider the bottleneck to be pharma acquisitions, so this is where we must look for forecasting the return of capital to the biotech markets. As of February 2024, the public market looks to have reached a nadir. If pharma views the market similarly to industry analysts, we should expect to see an uptick in pharma acquisitions in 2024. After the best technology has been purchased at rock-bottom prices from the public markets, pharma should again begin buying technology from the private markets and subsequently allowing the long-suffering late-stage firms to exit. The exit valuations will depend heavily on the level of financial distress of individual companies. Once pharma has purchased their priority late-stage (and therefore derisked) companies, this influx of capital should loosen the markets, enabling venture investors to return fresh capital into earlier-stage companies on the private markets.
1.9 In summary, we can say the light has turned green at the stoplight, but there is a very long backlog of traffic. Early signs from Q1 began to show signs of an uptick in pharma mergers and acquisitions (M&A), and the trend is continuing in Q2.(10) We predict late-stage biotech acquisitions will continue to pick up in 2024, followed by midstage institutional venture investing. The total number of Seed and Series A funding may not pick up until interest rates either come down or start on a downward trend, although the valuations appear to continue holding steady.
2 Funding Outlook, 2024–2025
2.1 So where do we stand, and what is the outlook for 2025? Analysts consider the bottleneck to be pharma acquisitions, so this is where we must look for forecasting the return of capital to the biotech markets. Although a few large exits, notably in the ADC space, have made news,(11)(12)(13) exit activity as of Q2 2024 is still depressed. PitchBook reported $14.5B in exits over 39 deals. When compared to the 2023 total ($20B over 97 deals), this indicates that the value of ongoing deals is at least on the rise, even if the total number of exits is not.
2.2 Both the NASDAQ(14) and the S&P(15) biotechnology indices have been steadily climbing since November 2023, with the exception of a relatively small downturn in April–May 2024. If pharma views the market similarly to industry analysts, we should expect to see an uptick in pharma acquisitions of private firms and late-phase investments, as the time for purchasing the best technology at rock-bottom prices from the public markets may have passed.
2.3 In March 2024, we reported that pharma would prioritize late-stage (and therefore derisked) companies. This appears to be playing out, as the 2024 investments are skewed in favor of phase II therapies, and phase I therapies are a distant second.[36] HSBC Innovation Banking reported a shift in investments to favor derisked therapies, which are generally later phase therapeutics.(16)
2.4 This influx of capital should loosen the markets, enabling venture investors to return fresh capital into earlier-stage companies on the private markets, assuming interest rates continue to drop.
2.5 In March 2024 we summarized by saying the light has turned green at the stoplight, but there is a very long backlog of traffic. As of Q3 2024, the very front of the traffic jam has begun flowing. We predict late-stage biotech acquisitions will continue to pick up in 2024, followed by midstage institutional venture investing. The total number of Seed and Series A funding may not pick up until interest rates either come down or start on a downward trend, although the valuations appear to continue holding steady.
3 Investment Returns are Softening
3.1. Despite the industry’s overall expansion, investment returns have underperformed. The PwC Pharma Index delivered a 7.6% return to shareholders from 2018 through November 2024, significantly lagging behind the 15% return of the S&P 500 over the same period.(17) The situation worsened in 2024, with the PwC Pharma Index returning 13.9%, while the S&P 500 surged by 28.7%. Investor sentiment remains cautious, influenced by persistent high interest rates and ongoing economic uncertainty.
3.2. The biotech sector has been particularly affected, with the XBI Biotech Index rising just 3.5% in 2024 (as of December 2024), reflecting weak investor confidence.(18) Additionally, biotech IPO activity was sparse, and those IPOs that did occur were largely undervalued, making it difficult for emerging biotech firms to secure the funding needed for growth and innovation.(19)
3.3. Amid ongoing financial challenges, mergers and acquisitions (M&A) have become the primary exit strategy for biotech firms.(19) While M&A activity increased in the first half of 2024, the total value of deals for the year declined compared to 2023, with most transactions involving smaller, bolt-on acquisitions rather than large-scale consolidations.(18) This trend reflects a more strategic approach by larger pharmaceutical companies, prioritizing targeted acquisitions that align with their existing capabilities rather than engaging in high-risk megamergers.
3.4. Looking ahead, M&A is expected to remain strong as companies seek to offset revenue losses from patent expirations and integrate new technologies and therapeutic modalities.(19) The focus will likely be on emerging areas such as antibody–drug conjugates (ADCs), cell and gene therapies, RNA-based treatments, and radiopharmaceuticals, which offer novel mechanisms of action and the potential for long-term growth.
3.5. At the same time, R&D spending is increasing at a slower pace, with a compound annual growth rate (CAGR) of just 3% for 2023–2030, compared with 9% during 2016–2023.(19) This decline in R&D investment is attributed to pipeline optimization, an increased reliance on M&A rather than internal drug development, and greater efficiencies achieved through artificial intelligence (AI). AI-driven drug discovery is streamlining target identification, clinical trial design, and biomarker analysis, reducing costs and accelerating development timelines. However, geopolitical uncertainties are also playing a role in investment decisions, with rising concerns over regulatory shifts, trade policies, and global economic stability.
4 ADC Funding is a Bright Spot in a Dim Landscape
4.1 Although the ADC niche of the market hasn’t been immune to the biotech funding lows, it has been one of the more resilient niches of the market. Investor interest exploded with $823 million invested in 2018, which significantly beat the previous highest investment of $109 million in 2014 (Figure 9). Although we can’t say for sure what were the key considerations for each of these investments, it is possible that the commercial success of some early ADCs was influential (Figure 10). The ADC investment landscape, along with the overall biotech capital market, remained bullish in the years that followed. When the rest of the investment market crashed in 2022, the ADC niche held strong and for a time observers thought the ADC market would be immune to the market downturn. In 2023, the market finally caught the ADC niche and total investment fell by 66%.
4.2 As of June 2024, however, this portion of the market has rebounded heartily, and the total investment dollars and overall M&A activity are indicators of a healthy market. M&A deals in the ADC space further supplement the market growth and investment trend. In fact, of the 15 ADC-related M&A deals between 2019 and 2023, 50% took place in 2023 alone. A detailed list of recent M&A deals is discussed in more detail in Section VI.
4.3 A regional breakdown of investments (Figure 11) reveals evolving dynamics among global markets. Asia is leading with maximum investments in the period 2013–2024 at ~$2 billion. The key countries in Asia have been China, South Korea, Japan, and Taiwan. Most of this investment has been in manufacturing capacity. WuXi, for example, has invested heavily in ADC development(20) and AstraZeneca is planning a $1.5 billion end-to-end manufacturing facility for ADCs in Singapore. It is expected to be operationally ready by 2029.(21)
4.4 Early-stage VC investing increased during the 2020–2022 investment bubble, and, as of 2024, the late-stage VC funding appears to be advancing the technology that reached the capital markets during the pandemic. Overall, the capital markets for ADC investing remain relatively positive.
FAQs
Why did biotech IPO valuations experience a sharp decline following the pandemic investment peak?
Biotech IPO valuations dropped substantially because 2020–2021 saw an influx of non-traditional capital and inflated valuations for early-stage companies with immature data. When cash reserves dwindled by 2022, recent IPOs fell up to 75% below their 52-week highs.
How have high interest rates impacted early and mid-stage biotech fundraising?
High Interest Rates reduced overall Venture Capital allocations and diverted funds into lower-risk fixed investments. While early-stage Seed valuations remained stable, mid-stage Series B funding squeezed, forcing biotechs to seek Venture Debt or defer first-in-human clinical manufacturing batches.
What strategies are big pharma companies utilizing for biotech acquisitions?
Major Pharmaceutical Companies are prioritizing derisked, late-stage assets—primarily Phase II clinical candidates—to offset revenue losses from looming patent expirations. Rather than engaging in early-stage acquisitions or high-risk megamergers, pharma is focusing on targeted, bolt-on M&A transactions.
Why are Antibody-Drug Conjugates (ADCs) outperforming other biotech sectors in funding?
Antibody-Drug Conjugates (ADCs) outperform broader market trends due to proven clinical efficacy, commercial track records, and strong exit activity. Following a temporary dip in 2023, high-profile deals by Pfizer, AstraZeneca, and Daiichi Sankyo accelerated ADC manufacturing and R&D capital inflow.
How is artificial intelligence (AI) influencing pharmaceutical research and development spending?
Artificial Intelligence (AI) is moderating R&D expenditure growth by streamlining target identification, biomarker selection, and clinical trial design. Biopharmaceutical firms leverage AI-driven drug discovery to reduce operating costs and development timelines while reallocating capital toward strategic asset acquisitions.
