"Biotechnology venture capital is recovering from its slide and investors are expressing optimism about 2025, even as they confront uncertainties weighing on their industry.
U.S. and European biotech venture funding climbed to $28.1 billion in 2024 from $21.2 billion the prior year, according to HSBC Innovation Banking, which works with startups and venture investors.
Biotech initial public offerings rose from 11 in 2023 to 18 last year, and mergers and acquisitions of private, venture-backed biotechs in which at least $75 million was paid up front increased from six in 2023 to 17 last year, the highest total since the 20 M&As in 2020, according to HSBC.
The outlook for biotech M&A is encouraging because drugmakers need to fill gaps from medicines coming off patent, the overhang from the presidential election is gone and inflation is more under control, said Roel van den Akker, principal, pharmaceutical and life science deals leader, for PricewaterhouseCoopers U.S.
"If you have a more-stable and predictable environment it's likely that we're going to see people lean into dealmaking a bit more in '25 than perhaps we've seen over the past two years," he said.
Last week, Johnson & Johnson agreed to buy publicly held Intra-Cellular Therapies, for $14.6 billion, and GSK said it would pay up to $1.15 billion to purchase venture-backed IDRx.
"We have been talking about cautious optimism for the last two years," said Arda Ural, EY Americas life sciences sector leader. "We can finally drop the 'cautious.'"
The recovery, however, is uneven and new headwinds could slow it.
Most biotechs that went public last year have traded down since their IPOs, and biotech stocks are essentially flat over the past year, two factors clouding the outlook for IPOs in 2025. And with the potential for new tariffs that might push inflation higher, some observers are tempering their optimism.
"I think things look really good, but I do have concerns regarding the macroeconomic policies that could impact biotech investing through inflationary results," said Robert Williamson, president, acting chief executive and director of venture-backed biotech company Triumvira Immunologics.
Investors have responded to uncertainty by placing what appear to be surer bets, channeling more money to fewer companies.
Biotech venture financings fell to 569 last year from 573 in 2023, and financings of $100 million or more -- megarounds -- grew 70% from 2023 to 106 deals in 2024, according to HSBC.
As capital markets constricted in 2022 and 2023, venture firms tended their own portfolios, propping up companies with insider rounds. By last year, firms were ready to focus more on new investments, but often favored startups led by repeat entrepreneurs who could raise giant financings to target big markets.
Megarounds reduce the risk of startups running short of cash and enable management to concentrate more on their businesses and less on fundraising. They also concentrate capital on the best science and management teams, proponents say.
Companies raising such large rounds are less likely to be acquired early on because few drugmakers are willing to pay giant sums for an early-stage company, some observers say.
Another effect of mega-rounds, raised through large investor syndicates, is that many venture portfolios start to look the same, said Jonathan Norris, a managing director with HSBC Innovation Banking.
This could complicate venture firms' efforts to stand apart when pitching their next fund to limited partners (LPs), he said.
"That is a cause for concern down the road," Norris added. "It doesn't feel like LPs are making more commitments to more venture funds. If anything, they're winnowing."
The trend toward sizable financings for startups in hot sectors, such as obesity, often excludes companies outside those sectors and startups pursuing innovative but still emerging science, some say.
"When you're going after a novel target that's yet to be proven in the clinic or the risk around it is perceived to be higher, it's been a very difficult fundraising environment," said Stan Abel, CEO of biotech startup ProJenX. "I'm optimistic that will start to change in 2025. There's good science out there that needs funding to advance into the clinic."
Megarounds have continued this year, but relatively few companies can command such large financings. As the year unfolds, more investors will return to backing startups raising smaller early-stage financings, said John Flavin, CEO of venture investor Portal Innovations.
"Those megarounds will work their way through the system," Flavin said. "There will be more attractive opportunities for the normalization of these earlier-stage, seed-through-Series A rounds."
Despite short-term struggles, biotech's long-term outlook remains bright because innovation is accelerating, investors say. For example, after years of investment and research, drugmakers recently developed new drugs for conditions such as schizophrenia, said Jonathan Behr, partner at Dementia Discovery Fund, which is operated by SV Health Investors.
"The quality and the state of innovation continues to be impressive," Behr added.” [1]
1. Biotech Venture Investors Bullish, but Worries Persist --- Funding for startups rose last year, yet fewer of them are drawing investment. Gormley, Brian. Wall Street Journal, Eastern edition; New York, N.Y.. 24 Jan 2025: B6.
