Uncertainty Reigns in Biotech as Industry Awaits Key Policy Decisions

The biotechnology sector faces a challenging landscape marked by economic uncertainty, regulatory scrutiny, and shifting investment patterns, according to EY's 35th annual "Biotech Beyond Borders" report. Industry leaders are closely monitoring potential pharmaceutical tariffs, tax rates, and interest rate changes as critical indicators for the sector's future health.

Economic Headwinds and Investment Trends

The biopharma industry is grappling with a constrained investment environment, reflected in a 0.2% decline in U.S. real GDP during the first quarter of 2025. Biotech financing decreased by 10% to $73 billion in 2024, with a further 17% year-over-year decline in the first quarter of 2025.

Despite these challenges, early-stage funding increased by 10% in 2024, although the number of early-stage deals decreased by 20%. This trend suggests that investors are making larger bets on fewer assets, leading to a growing divide between well-funded companies and those struggling to secure capital.

"We now have about 40% of public biotech companies operating with less than a year's cash," said Ashwin Singhania, EY's Principal of Life Sciences Strategy. The funding environment has become increasingly selective, with venture capitalists focusing their resources on their most promising companies and products.

M&A Activity and Strategic Alliances

The pharmaceutical and biotech sectors witnessed a shift in deal-making strategies in 2024. M&A activity decreased, with 54 deals totaling $77 billion, compared to 61 deals worth $153.5 billion in 2023. This decline is partly attributed to increased scrutiny from the Federal Trade Commission, which has remained active under the current administration.

In response to the challenging M&A landscape, the industry has pivoted towards strategic alliances. EY reported 220 alliance deals in 2024, with a combined value of $144 billion in biobucks – the highest in a decade. This trend reflects pharmaceutical companies' preference for milestone-based agreements, which shift risk to smaller biotechs.

Notably, there has been a surge in dealmaking activity involving Chinese biotechs, with 40 alliances formed in 2024, valued at $31.5 billion. This trend has accelerated in 2025, with 13 more alliances struck in the first quarter, totaling $18 billion in biobucks.

Policy Uncertainties and Future Outlook

The industry's future hinges on several key policy decisions expected in the coming months. Arda Ural, Ph.D., EY Americas Life Sciences Sector Leader, identified three critical milestones:

1. The outcome of the Section 232 review, which could lead to pharmaceutical tariffs.
2. A potential interest rate reduction at the Federal Reserve's September meeting.
3. The passage of a new tax bill, which may include favorable corporate tax rates.

"If all those clear by October 1, that's a very different market we are looking at versus what we are living right now," Ural stated.

Despite current uncertainties, industry analysts remain cautiously optimistic about future opportunities. The top 20 pharmaceutical companies have a combined cash reserve of $1.27 trillion, which could fuel M&A activity once market conditions stabilize. Additionally, these companies face a potential revenue gap of over $300 billion through 2028 due to patent expirations, creating a strong incentive for strategic acquisitions and collaborations.

As the industry navigates these challenges, EY advises companies to focus on fundamentals. Pre-revenue firms should prioritize their most promising assets and cut costs, while revenue-generating companies should examine their supply chains, manufacturing networks, and workforce composition. The report also highlights the potential of artificial intelligence to provide "immense productivity gains" across the sector.