Outlook summary
To the extent there are tea leaves to be read from the recent JPMorgan Healthcare Conference, the sector enters 2025 with cautious optimism, driven by a strong domestic economy, expectations for limited (FDA) or even favorable (FTC) regulatory adjustments and respectable M&A activity that is freeing capital to flow back into the sector. Small- and micro-cap healthcare companies generally are having success in navigating regulatory uncertainty and securing financing, creating optimism that the sector in 2025 is poised for recovery. That said, the changing administration along with the ongoing risk of inflation and questions about interest rate declines are creating uncertainty in an already uncertain market.
Clear blue skies this year – a harbinger for an improving fundraising environment?
Following the challenging financing landscape over the past three years for the healthcare sector – in particular for smaller public companies – the capital markets outlook for 2025 is more optimistic. The volatility and uncertainty in equity markets has shifted reliance to financing mechanisms including PIPEs, registered directs, venture debt and newer alternatives including tranche-based rights offerings. We believe companies that previously were raising lesser amounts opportunistically throughout 2024 are planning for fewer yet larger raises in 2025. Expectations appear to be that the slow IPO market of the past two years is likely to continue, while the white-hot market for private investments – in particular Series A and B rounds – will continue.
Resurgence in M&A
After a slowdown in 2024, the biotech industry is witnessing a renewed wave of M&A activity. Notably, Johnson & Johnson’s $14.6 billion acquisition of Intra-Cellular Therapies (the largest biotech acquisition since 2023), GSK’s purchase of IDRx for up to $1.2 billion and Eli Lilly’s procurement of the cancer drug STX-478 from Scorpion Therapeutics for up to $2.5 billion underscore this trend. In contrast, days before the conference started, Biogen acquired the balance of its partner Sage Therapeutics for a price that’s less than the target’s cash. This uptick may continue due to expectations for a more deal-friendly FTC, dovish outlook for monetary policy and lowered valuations producing attractive acquisition opportunities. This increase in M&A may free additional capital to flow back into the sector.
Re-positioning as a strength
We believe that strategic repositioning is emerging as a key trend going into 2025. Companies are increasingly exploring and implementing strategic alternatives, including spin-offs, divestitures and M&A. Companies are repositioning by spinning off non-core assets and priming themselves for acquisition. Related, asset licensing terms are in transition. Should the 2024 trend continue, we can expect continued strength in the number of deals, yet with lower upfront cash and equity components.
Policy and Fed uncertainty
The incoming Administration’s stance on a wide range of healthcare policies, and a fluid situation regarding priorities and depth of change particularly regarding drug pricing reforms and vaccine regulations, is creating uncertainty. Industry leaders are generally optimistic, hoping for policies that address inefficiencies without disrupting the ecosystem. Staff turnover has already begun at the FDA (and the SEC), although the appointment of Dr. Marty Makary as Commissioner is viewed overall as being industry friendly. The bigger question mark concerns Robert Kennedy Jr. and his plans for HHS. This uncertainty is influencing investment strategies and capital allocation within the industry. In parallel, the uncertain outlook on interest rates is a wildcard, with the conventional wisdom that lower interest rates will catalyze interest by generalist investors back into the sector.
Efficiency is currency
De-risked assets have been increasingly attractive as a hedge against riskier investments in new molecular entities. Companies are working to streamline processes with efficient clinical trial designs, including considering adaptive trial designs where studies evolve based on interim data, allowing for faster conclusions about efficacy and safety.
Miscellaneous thoughts
Other unanswerable observations: Are bomb-sniffing dogs the new normal at healthcare investment conferences (they’re adorable and helpful, so why not)? Has San Francisco turned the corner in addressing its litany of challenges (we sure hope so)? Are the lyrics “It never rains in California” the state’s new motto (we sure hope not)?
Connect with us!
To learn more about our services or clients in the healthcare sector, please reach out to capitalmarkets@allianceadvisors.com.