Please find attached a report on biopharma market trends for 2025.

 Kicking off 2025

We have spoken to numerous biotech investors in recent weeks and can report that sentiment is not good.

The mood is not great, and word has spread throughout the market that the majority of biotech hedge funds sent out letters to LPs showing negative returns for the year.

December was particularly brutal – even for the best hedge funds.

Somehow the bubbles in New Years’ champagne weren’t quite as robust as they might have been a year ago.

Even for funds that were flat for 2024, the problem is that the S&P 500 index registered a 23% gain in 2024. And that was on the heels of a 24% rise in 2023.

You can imagine that biotech hedge fund LP’s aren’t exactly dancing in the streets right now.

What’s particularly challenging is how wide the gap is between biotech performance over the last four years and tech stocks.

We began 2023 with a 106% differential between the S&P IT Index and the XBI since the start of 2020.

By year end the gap had hit a mind-boggling 186%.

This is crazy.

Biotech is an awesome sector. And, while tech is great too, this performance differential seems hard to explain based on any obvious fundamental factors.

We spoke to one highly discouraged hedge fund limited partner on December 30^th who was recounting negative fund letter after negative fund letter.

He said “maybe biotech just isn’t that great of a place to be.” “Maybe we should own up to the fact that most of good performance in biotech was driven by just a few lucky years.” Perhaps, he mused “we need to recognize that the clinical risk in this sector combined with systemic management overspending makes biotech a poor place to invest.”

These are all perfectly understandable responses to watching one’s wallet shrink without explanation.

The situation calls for a fundamental look at a few things:

•  What actually took place in 2024?
•  What’s actually going on in the market?

We don’t pretend to have perfect answers, but we would like to share a narrative for how the biotech market has underperformed – with a focus on key drivers in 2024.

Four Factors Underlay the Biotech Markets Relative Underperformance in 2024

FUND REDEMPTIONS: We can confirm that several large hedge fund groups received unwelcome redemptions in 4Q24. These hit in the week following Trump’s election and, in that period, when it felt that the market should be headed up based on Fed talk, a great FTC decision (for biotech) and a relatively benign FDA appointment, the market headed down and stayed down. This reflected forced selling of biotech stocks and caused December to be a weak month for the XBI.

M&A MARKET: More than almost any other industry, the biotech sector depends on a steady diet of M&A deals to bolster public stocks. The many stocks that investors thought might get bought in 2024 didn’t. There were no public biotech takeouts for more than $5 billion all year. This was a definite negative because investors didn’t get the pops and they also didn’t get fresh capital to redeploy in the many new stories that hit the market in 2024.

SCALE & AI DRIVING TECH: Subpar biotech performance was only half the story behind divergence over the last five years. The other part was the stellar performance of tech. Tech companies have become really large and new ways of organizing companies have helped to overcome traditional diseconomies of scale. Built-in economies associated with AI, lock-in, operating system control and cloud propelled stellar earnings growth in the tech sector.

CONFIDENCE: In many of our reports in 2024 we argued that the biotech market should go up. We don’t think our arguments, in retrospect, lacked merit. The issue, rather, involved a confluence of relatively low investor confidence in the market coupled with the notable absence of entry into the market by generalist investors. Economists like to refer to “multiple equilibria” in markets. We got stuck in the bad equilibrium in 2024 and this was related to poor confidence in the biotech market.

On the Scale Point

We spent the weekend before Christmas visiting a friend who works for Amazon in Seattle. She took us around many of Amazon’s facilities downtown and we started to learn a little bit about how large their cloud business is and how it works.

Amazon is making more than $100 billion in revenue in its cloud business and enjoys outstanding profit margins by allowing anyone to access computing and data storage over the net virtually.

This business has been growing in the 10 to 20% range and, based on what we heard, could see its growth accelerate in the years ahead.

This business is massively scalable and much harder to imitate than you might think. For example, we learned that competitors have a very hard time competing on cost because Amazon uses chips from a fab that it owns (called Annapurna Labs) that are optimized for cloud computing infrastructure. Amazon is massively more efficient in the cloud.

More broadly, we are seeing very high growth rates from the large tech players fueled by business models that involve customer lock-in, powerful network effects and direct relationships with consumers. We have argued elsewhere that pharma needs to wise up to the possibilities available in healthcare but there is no sign anywhere (that we can see at least) that this is happening.

What we learned on our trip to Amazon is that the leverage per employee can be massive and that software and AI can fundamentally redefine the span of control in a modern enterprise.

That is, in tech you don’t need some insane, GM-like org chart to manage a large business.

It’s not clear to us that the limits to scale in a technology-enabled enterprise have been remotely reached.

We left our trip thinking (1) the boom in tech stocks is far from over and (2) the healthcare industry needs to figure this all out before the tech industry figures out healthcare.

On Investor Confidence

An equally abstract discussion can be had about investor confidence and financial markets.

Grizzled Wall Street veterans will be the first to tell you that markets can be vastly inefficient.

Mike Milken was famously featured in an article in Forbes in the 1990s alongside Merton Miller, eventual Nobel-Prize winner and University of Chicago Professor (aka the “High Priest of Market Efficiency”). Milken argued that it can be perfectly rational for participants in the market to reach the wrong conclusion about what security prices should be.

Our own experience tends to back up Milken’s observations.

In the long run, for example, the cash flows from a biotech or its underlying M&A merits will determine its value.

But in the short and medium run, investor fashion and sentiment can cause its share price to stray far from the type of rational probabilized NPV that Miller might want to see, particularly when the probability of an M&A event is low.

Our own gut instinct is that we saw ever stronger specialist investors in 2024, who played a strong hand in the market – participating, for example, in an advantaged way in the PIPE market.

While individually rational for each specialist healthcare fund, our fear is that generalists and retail investors have increasingly realized that biotech is a tough game for them to participate in given the rise of specialists.

In contrast, tech stories like Amazon or Nvidia are easier for the generalist investor to understand.

There’s nothing subtle going about what’s going today at Amazon or Nvidia. No Ph.D. is required.

One of the most remarkable aspects of our investor dialogue in the first week of 2025 has been the lack of interest in bargain situations.

It’s not unusual after a few bad weeks in the market for investors to indicate the beaten down stock that they favor the most for acquisition.

As highlighted in a “Heard on the Street” column by David Wainer in the Wall Street Journal on Jan 6, 2025 there is no shortage of bargains in healthcare at the moment.

Uncertainty about the direction of the overall market is high after two great years in the S&P 500 and with the Trump Administration coming in, there is a desire to see what this all means for healthcare.

The first week of 2025 turned out to be quite a tough one and, as a result, several planned IPOs were moved back to February or postponed indefinitely.

The discussions right now inside the larger specialist fund groups related less about what one should buy and more about protecting against further downside by moving into more liquid names or pulling out the market altogether.

From what we hear, fund managers are highly focused on near-term catalysts and how to play those and are not so interested in long-term value opportunities.

This will all get resolved in time once the core confidence issues are worked through.

Brighter Days Lay Ahead

Over a long period of time the biotech market has been a great place to invest in for those who are able to ride out difficult times.

It is hard to justify the poor performance of the XBI in 2024 using any story regarding fundamentals.

Yes, it’s true that M&A was light.

And inflation has been a problem.

Oh, and the tech sector is doing well. 

But there has been so much positive in biotech to talk about:

1. Inflation has come down massively
2. Numerous positive market developments (see below)
3. Strong underlying scientific progress (see below)
4. We have an administration in the U.S. that, while unpredictable, is likely to be far more friendly to biopharma on pricing and antitrust than the last
5. Underlying R&D productivity is improving
6. Tax cuts are on the way, and they will be fundamentally positive for risky asset classes
7. Long-term trends support the growth of the sector

To reiterate a point we have made in the past: the value of biotech stocks is up twenty times over the last thirty years.

That’s no anomaly.

Biotech has been a great place to put capital over time. 

Ten Major Positive Biopharma Market Developments in 2024

1. Summit's pathbreaking HARMONi-2 data on VEGF/PD1 bi-specifics in Lung Cancer
2. Highly cooperative FDA (50 NDA approvals)
3. T-cell engager data in NEJM for autoimmunity
4. Venture market raised more than 99 rounds of more than $100 million
5. Obesity data everywhere: GLP data in multiple non-obesity indications (e.g., MASH, sleep apnea) + Regeneron’s/Scholar Rock’s data for muscle-enhancing drugs
6. Revolution Medicines’ strongly positive survival data for a pan RAS inhibitor in pancreatic cancer
7. Merck’s approval for sotatercept in pulmonary arterial hypertension
8. Bristol-Myers’ approval to market COBENFY^®, the first major new option for schizophrenia in years
9.  Pfizer’s stunning data for ponsegromab in cancer cachexia
10. Impressive Intellia clinical data on two gene editing programs (ATTR amyloidosis and HAE). This follows the late 2023 approval of CRISPR/Vertex’s CASGEVY for sickle cell anemia

Strong Underlying Biology Progress

Progress in basic science and understanding of biology was stunning last year and reflects the inexorable accumulation of knowledge associated with improved life sciences tools like single cell sequencing and deeper analysis of the genome, proteome and transcriptome. Here’s our list of the top ten most impressive advancements in bioscience in 2024:  

1. Gilead’s Lencepavir trial in HIV prevention
2. Lichtman Lab maps a cubic mm of the brain
3. Princeton team maps the fruit fly frain
4. Better ALK Inhibitors (including Nuvalent and Xcovery)
5. Alnylam’s Helios-B data
6. Brain-Computer interface work progresses
7. A paper from ETH Zurich showed that adipocytes retain epigenetic “memory” of obesity
8. Explanation of female autoimmunity found
9. A study by Paul Ridker found that baseline Lp(a) was just as important as LDL cholesterol and CRP in predicting incident cardiovascular events in a cohort of 30 women
10. Massively parallel gene editing working well in agriculture for giant markets

Predictions for 2025

Our Views on the Macro and Political Outlook in 2025

The markets top concerns in biotech going into 2024 were macro and geopolitical risk. Coming into 2025 the risk of inflation appears to be less and key geopolitical hot spots appear much more manageable. There is a school of thought that Trump Administration policies (e.g., tariffs and deportations) will be inflationary. We’re not so worried here because Trump and his advisors understand that re-igniting inflation would be political suicide. If there’s one thing they want to do, it is to create economic growth and bring interest rates down.

We see Trump Administration policies as fundamentally good for biotech. Lower taxes and pro-innovation policies should prove to be a big positive for the sector. We’ll see bombast here and there, but we think the Trump bark is likely to be far worse that its bite (as it pertains to the biotech and pharma sectors). This said, there is high uncertainty associated with new faces in unexpected places (e.g. RFK in HHS, Oz in CMS etc.).

Numerous investors cite “high uncertainty” in the current environment as a big negative. Looking back at the weak market in December, we blamed RFK/Oz for risk and uncertainty but now know that a toxic combination of fund performance-triggered redemptions and negative catalysts were the real cause of poor biotech market performance.

We do think that the IRA gets redesigned in the Trump Administration as it’s fundamentally a Democratic construct. We see Trump preferring jawboning as a mechanism to control pharma prices rather than direct negotiations against drugmakers.

The focus of groups like “No Patient Left Behind” on fighting against cost-effectiveness analysis (CEA) requirements built into the IRA will remain well-founded as both governmental and private groups like ICER are going to continue to try to use CEA as a blunt weapon against the pharmaceutical industry.

The real question is how quickly biotech investors and external generalists will regain confidence in the market.

We think success will beget success in this market but it’s going to take time for this to all play out.

Our Views on the Public Biopharma Capital Markets in 2025

A consistent feature of the 2024 market was a high-quality premium (investors stuck to later stage and derisked stories that were seen as better M&A bets). If anything, this premium went up throughout the year.

For 2025 we foresee:

1. Another positive year for biotech with the XBI up materially this year versus last.
   
   
2. A gradual decline in the quality premium and greater willingness of investors to take risk on emerging stories.
   
   
3. This will all be fueled by tax cuts in Washington – which get signed by President Trump by mid-year. These energize the market very much as they did in the Reagan Administration in 1980.
   
   
4. Biotech investors stay focused on stock picking and funding the best stories. Preference for great science, mid/late-stage biopharma and commercial growth opportunities. No general euphoria sweeps the market.
   
   
5. A continued very strong follow-on market for quality names:

1. As the quality premium comes down there will be more access for companies that don’t have positive data catalysts.
2. But the market remains highly bifurcated with much less access to fresh capital afforded to companies with market caps under $250 million. This doesn’t change for some time to come.

6. Turbulence and volatility remain in market:
   1. Some hedge funds continue with drawdowns while others attract fresh capital.
   2. Quant funds continue to create market volatility and bizarre situations where good news events are followed by share price declines.

We also see continued strong performance of cash flowing, revenue positive companies in areas like generics, biosimilars and specialty pharma. In an early recovering market, we expect that commercial stage companies will perform the best in 2025.

It is highly likely, in our view, that M&A volume will pick up substantially in 2025:

1. A relaxed FTC will help
2. Some big LOE gaps remain ahead that will motivate external pick ups of pipeline.
3. There are some brakes on the M&A market that will very likely keep volume to an “average” level rather than a blowout level.
4. Pharma isn’t going to be hitting the big red “M&A deal” button so quickly as it will still risk antagonizing government authorities which have substantial discretion in pricing conversation.
5. The availability of good mid-stage drug candidates from China at prices far below those in the U.S. biotech market pushes pharma to license certain technologies rather than to buy them in the biotech market (more on this later).
6. The very best biotech names are expensive due to the aforementioned quality premium – pharma may choose to wait it out
7. Big pharma balance sheets that are not as strong as they were in previous years
8. Companies with strong balance sheets that are less vulnerable to adverse pricing discussions (think players like Genmab or Incyte) will continue to be more likely to resort to the M&A market.

Further, we expect a meaningful increase in IPO activity:

1. Mid to late-stage therapeutics are favored. We don’t see a return to preclin IPOs as we had in 2021.
2. We continue to expect to see strong obesity stories like Kailera, Metsera and Orion will do well in IPOs in 2025.
3. We think that there will be some big “story type IPO’s” in emerging fields like brain-computer interface (think Neuralink) and AI/medicine (think a Verily or Ada Health).

We expect to see the PIPE pick up in 2025:

1. While strong in Q1 2024 the market cooled down as 2024 rolled on.
2. We see the PIPE market picking up substantially in H1 2025.
3. The ability to give specialist funds real time to analyze a deal before committing is an enduring positive of the PIPE market

We anticipate that healthcare specialists continue to rule the public markets in biotech and spec pharma:

1. Ever fewer generalist public investors participate in biotech (think of groups like Royce Funds).
2. More and more funds with access to Ph.D.’s and MD’s (ideally on staff) gain assets.
3. We will also see relative growth from groups like Deerfield, Orbimed, Perceptive and RA that invest across multiple asset classes in the life sciences (e.g., venture, public and credit)
4. We will see more groups like Bain, Fairmount and RA sponsor public newcos into the markets as was commonplace in 2024.
5. We will see relative growth of specialist groups despite some poor performance in Q424.
6. The ability of specialist groups to move/influence/drive small/midcaps is going to grow.
7. Generalists will eventually return to the market – along with retail – but this will be more of a 2026/2027 phenomenon than a 2025 thing.
8. Funds with good access to top family offices and MidEast money will grow disproportionately in 2025 (e.g., Patient Square).

Despite current confidence issues, we believe that biotech venture capital funds will thrive in ’25:

1. We see volume as being up in 2025, but it will not surpass the record seen in 2021
2. The trend towards larger round size will remain in 2025 as firms find that more scaled up companies and stories do better overall
3. Funds that tend to sponsor their own companies as opposed to invest in those of others do particularly well (think groups like Atlas, Column Group and Versant)
4. These groups use cap table control to engineer better returns and use better returns to be able to afford great teams that keep the circle of virtue turning
5. Healthtech efforts of groups like Andreesen Horowitz/GC etc continue to grow
6. Incursion of tech VC’s into healthcare accelerates – particularly in areas like AI in healthcare delivery and brain-computer interface

We believe that life sciences private equity comes roaring back in 2025 and is a lot more sophisticated than before:

1. More and more PE platforms understand the life sciences sector well
2. Despite a paucity of exits the disorder in public markets early in an upcycle plays well to PE firms
3. Credit markets quite healthy right now – which feeds the upcoming PE wave
4. Today’s market very similar to that in the early ’80s (Reagan era) when PE took off

Key Biopharma Market Predictions for 2025
 

1. Continued shift towards big drugs for big diseases - this trend is just getting started:
   1. This theme evolves a bit – more to what we call “cures over treatments” for “diseases that matter” – the emphasis is on transformational treatment for reasonably large groups of patients in real need.
   2. Examples of drugs that should be “really good” for “big diseases” include TCE’s for autoimmunity and VEGFxPD1 bispecifics for lung cancer.
   3. Oncology has been waning in recent years and comes back in 2025 but not in the same way as before. Less focus on mutations and more focus on larger indications.
   4. Cancer ultimately becomes one of the very biggest areas in pharma but only when we get good pan-cancer drugs. This is in the cards for the next five years but not necessarily in 2025.
2. Cardio gets even hotter with particular interest in highest unmet needs such as heart failure, hypertension, rhythm disorders, atherosclerosis and PAD.
3. Fibrosis does well in 2025 thanks to big progress at companies like Agomab, Alentis and Boehringer.
4. I&I focus starts to differentiate more. The relevance of B-cell and innate pathways gets ever higher:
5. Immune cell engagers (e.g., doubles and triples) do really well.
6. We see some comeback for CAR-t in autoimmune.
7. We see really strong results from some extracellular IgG degraders in autoimmune (think Biohaven / Lycia etc).
8. Neuroscience continues to deliver breakthroughs with its usual share of heartbreaks, particularly in areas like psych (e.g., orexins), PD (e.g., Bluerock), degeneration (e.g., Monument) and epilepsy (e.g., Neurona).
9. Degraders have a really big year in 2025:
10. This is the year where we see results from the likes of Arvinas, C4, Kymera, Monte Rose, Nurix
11. Technical evolution in this area with novel types of molecular glues continues to shine
12. Other areas of high innovation remain important. We expect to see, for example, that  RNA therapies will dazzle us with data in 2025.

In other areas we expect to see:

1. RFK Jr. focus on foods and basic health fails to resonate:
   1. The masses keep eating burgers and fried chicken despite exhortations about food supply
   2. No real support for change in nutrition exists although better labelling for ultraprocessed foods does get through
   3. National debate on improving access to GLP-1’s ultimately accelerates
2. Pharma strategy continues to evolve in the face of disruption from companies like Regeneron and Vertex:
   1. More interest in involvement with health systems / population health
   2. More waking up to the China / India innovation opportunity

3. Money flows heavily into spec pharma in 2025 due to abundance of bargains and excellent growth opportunities despite payor stances.
4. AI effect on health systems starts to become real
   1. Agents start to really move the needle
   2. Unexpected applications shine (e.g., using the computer to negotiate endless insurance company paperwork)
   3. Tech-enabled pharma services do particularly well
   4. Use of AI for the underserved becomes a thing

5. ADC's continue to excel:
   1. Not quite as much attention as those immune cell engagers
   2. Hybrid platforms become ever interesting. For example, we are watching Sutro's immune + ADC engager platform with interest
   3. We are watching pan-tumor targets like CTLA4 and Epcam with interest for data in 2025 (e.g., CytomX/BioAtla)

6. China importance to our ecosystem gets bigger as the wave of biopharma innovation continues there
   1. We start to see China IPOs of quality biotechs (e.g., BeOne) hit U.S. shores
   2. At the same time the tensions between the U.S. and China gradually improve with greater collaboration in the biotech sectors
   3. Recent moves by groups in Congress and our own BIO organization to distance the U.S. from the Chinese life sciences ecosystem (e.g., BioSecure Act) lose momentum as its recognized that such measures are unlikely to have much positive effect on national security

7. “America first” theme matters ever more in CDMO space:
   1. Recent sale of Wuxi CGT business highlights trend
   2. More interest from PE’s in domestically located biologics facilities
   3. Strategic acquisitions of domestic capacity grow throughout 2025

8. Obesity drugs become even more embedded in American society in 2025:
   1. If there is one change we’ve noted in our personal lives it is how many friends and family members benefitted from GLP-1s
   2. We see the obesity getting even bigger in 2025 than we think it can as more and more data comes out
   3. While there have been some notable setbacks in recent months with drugs like MariTide and Cagrisema, we are going to see fresh data out in 2025 on numerous novel MOA’s in obesity and the odds are that the market evolves positively
   4. Muscle becomes an ever bigger theme in the obesity landscape
   5. The consumer becomes an ever bigger theme in the obesity landscape (highlighted by names like Gan&Lee / Metsera)

It’s worth pausing and highlighting the paramount importance of obesity drugs for the future of biotech as we head into 2025.

A late 2024 survey by Bain Consulting showed that GLP-1’s are profoundly changing the lives of Americans. It’s very clear to us at Stifel that widespread use of GLP-1’s and their clear overall health benefits are affecting people’s overall view of wellness. 

We personally know so many people who are on GLP-1’s and the prospect/success of them losing weight and feeling better is leading them to live healthier lives generally (work out more/eat better/etc).

Couple this with the literature on the negative effects of alcohol, the explosion of non-alcoholic beer and wine and the Surgeon General’s recent proclamation that alcohol is the number 1 cause of avoidable cancer, and it feels like a broader shift is underway in our society in which GLP1s are playing a big part.

We also think the consumer sentiment against the healthcare system generally is a theme that will continue and is something that some politicians can’t miss. The recent tragic killing of the United HC CEO started a discussion that highlights societal concerns about the cost of healthcare in America. Interestingly, this shifts the conversation more onto healthcare overall than just pharma pricing per se.

We see this dialogue continuing in 2025 with less demonization of pharma and a broad examination of healthcare costs.

One of the most striking ironies in this evolving consumer picture is that most insurers like United Health are very reluctant to cover weight loss drugs and the U.S. government doesn’t pay for them at all.

We see important changes taking place in this area in the next several years. 

What is Going to Work in the Markets in 2025

We believe that the public market has largely understood and valued the implications of promising therapeutic areas such a:

1. Cardiometabolic disease, especially obesity and heart
2. Immunology
3. Targeted protein degradation
4. Genetically-targeted oncology
5. Effective, rare disease therapeutics
6. Pneumococcal vaccines
7. T-cell engagers and ADCs in oncology
8. RNA therapeutics

We believe that the public market has yet to properly value the implications of emerging therapeutics in areas that include:

1. Orally delivered drugs that modulate GPR75, GIP and other novel targets for obesity
2. Novel developments in neuroscience, particularly mutation-targeted therapies, selected cell therapeutics and orexins
3. T-cell engagers in immunology, particularly triples
4. Degraders in immunology and cardiology
5. Muscle targeting drugs, particularly myostatin inhibitors
6. Further developments in Fc gamma receptors and IgG Tx

In a likely declining rate environment, we expect to see particularly good returns associated with lower risk, medium duration assets that include

1. Private equity plays
2. Credit plays
3. Commercial growth equity plays
4. Specialty pharma plays
5. Generic drug companies

Historically, commercial stage and late-stage companies do best early in an upcycle and early stage companies do better later on. We think that is the pattern that will play out in the current context.

Private Venture Market Themes for 2025 and Beyond

Approaching Translational Readiness

Just as obesity shifted into a translationally ready field around five years ago, we expect to see translational readiness hit a number of gigantic areas with strong implications for returns in the decade ahead:

1. Drugs to increase lifespan
2. Bioelectronics
3. Fibrosis
4. Hair regrowth therapies
5. Female-predominant diseases
6. Pan-tumor approaches (e.g., Myc/Elane)
7. Gene editing for agriculture

Giant IPOs of the Future (ex Pharma)
 

Other commercial areas where explosive growth (and large IPOs) lay ahead include:

1. Innovative value-based care delivery models that leverage biosciences know-how
2. Applications of ‘Omics technologies to areas like healthcare and life insurance
3. AI-enabled consumer-driven comprehensive care, particularly for patients that do not have good access to care

Expectations for M&A in 2025 are Top of Mind
 

There is much that is being said on M&A trends for 2025.

EvaluatePharma put out a nice report on the markets for 2025 last week. They said that while M&A will be up in 2025 don’t expect “the floodgates to open.”

Daphne Zohar, CEO of Seaport Therapeutics commented on next week’s JP Morgan confab and M&A expectations:

“If we don’t see a lot of M&A between now and, like, the Tuesday of J.P. Morgan, I think we’ll have kind of negative sentiment.” Zohar is quite confident that M&A will return at some point: “They [pharma] really need to fill their pipeline, so at some point they’re going to get pretty aggressive.”

Deloitte has expressed similar views recently saying “larger biopharmas are eager to replenish pipelines that will shrivel in coming years through “patent cliff” loss of exclusivity on numerous blockbuster drugs—such as Johnson & Johnson/Bayer’s blood thinner Xarelto® (rivaroxaban), Boehringer Ingelheim/Eli Lilly’s Jardiance® (empagliflozin), and AstraZeneca’s top-selling drug Farxiga® (dapagliflozin). Jardiance and Farxiga are both sodium-glucose cotransporter 2 (SGLT2) inhibitors indicated for type 2 diabetes, chronic kidney disease, and heart failure.”

Jeff Jay, Head of Great Point Partners, an active investor in biotech public markets said in 2025:

“I am pretty optimistic about M&A in 2025.  The dollar value (not number of deals) was at a 10 year low last year.  Lina Kahn drove that, so I feel with a Republican FTC Head the pendulum will swing back here.”

In contrast, Ed Saltzman of Lumanity recently said:

“M&A is in a lull for more reasons than FTC excess.  It turned out to be a bad idea in retrospect but for a decade or more the majority of all venture investment went into immune-oncology programs that Pharma now has little to no interest in.  Ditto for rare disease.  Ditto for cell therapies.   I suspect half or more of the delas we do see will be for obesity and metabolics companies.  I fear the same bubble is now approaching for all the I&I companies funded over past 5 years.”
 

We can share a few things:

1. While biopharma dollar volume was at a ten-year low last year the number of $1bn deals was quite respectable. If you will, larger deals were gone due to the FTC’s stance but there will still plenty of biotech takeouts.
2. However, when we dug into the $1bn to $10bn deals of 2024, we found that the actual dollars returned to shareholders were modest ($26 billion) relative to the scale of the market and well down from 2024.
3. We found the less than half of $1bn+ takeouts last year were for public biotechs – mainly the action was for private companies.

We expect to see M&A pick up quite meaningfully in 2025.

Macro Picture

Inflation and Rate Picture Improving

The U.S. inflation picture in late 2024 looks far brighter than it did 18 months ago. Inflation is very close to the Fed’s target rate of 2%. Nonetheless, we have not seen CPI inflation in the U.S. go below 0.2% per month since July, hence the Fed’s recent slowdown in rate cuts and the associated collateral damage on the XBI. The Fed is also nervous about how Trump policies might affect inflation.

On the other hand, the 10-year Treasury bond yield remains stubbornly high. Today, rates are as high as they were in May of 2024.

Credit market conditions today are favorable. We are in a period of relative economic strength and investors are chasing yields. As a result, we have seen the differential between junk bond yields and equivalent duration Treasuries fall below 2% in 2024. Low credit borrowing costs are a big positive for private equity deals which tend to substitute debt in the capital structure for equity.

Interestingly, with potential upcoming Trump tax cuts, receding inflation and cheap credit we may be poised for the type of private equity boom that took place in the early 1980s under President Reagan.

Geopolitics Picture Improving
 

We saw 2023 bring into the open a loose axis of interests between China, Russia, Iran, North Korea and their proxies. While this axis is ultimately threatening to global stability and the markets, it is remarkable how little progress has been made by Russia and Iran in 2024. Russia gave up 400,000 lives in 2024 to gain 6% of Ukraine territory while Iran’s interests were beaten badly by Israel.

We see the impact of geopolitics on the biotech market as inherently limited in 2025. We are optimistic that 2025 will be a year of geopolitical calm. A key question will involve the Trump Administration’s engagement with China and potential tariffs on that country. We are hopeful that we will see more normal relations emerge with China in the months ahead.

The VIX and the Markets

The Pandemic period has been remarkable for high market volatility. The VIX, a measure of investor fear, has averaged 23% since the Pandemic began. It has only been this year, where we have seen the VIX come way down. Today’s value of 16% is down substantially from Pandemic levels although up a smidge from a year ago. It’s well understood that a low VIX is positive for market performance and for biotech issuance activity, especially IPOs.

The Biopharma Market

After a year of furious rallies and tough downdrafts the XBI ended within 1% of where it began. In total, the XBI was up 0.9% for 2024.

Despite the XBI result, the total enterprise value of the global biotech sector rose by 22% in 2024 after adjusting for exits and entries. While impressive, the last two months of the year were brutal. The total sector EV was up 47% as of Nov 8, 2024 and gave back more than half of the year’s gain in just two months.

Recent weeks have seen significant reshaping of the global public biotech universe. Far fewer companies today are at negative EV than were a year ago. On Dec 30, 2023 we found that 17.4% of all biotechs worldwide had negative EV. On Dec 31, 2024, that percent had fallen to 15%.

We saw the number of public biotechs shrink by 7.5% in 2024. If defunct companies were not doing so many reverse mergers this number would have been at least double. By comparison, in 2023 there was only a 3% reduction in our count of global listed pre-commercial therapeutics companies. Since May 2022 the count of public biotechs has dropped by 15%.

Last year saw a 4.2% rise in life sciences stocks worldwide. The sector’s value rose by $386 billion to end the year at $9.6 trillion. Most of this reflected growth in obesity-oriented pharmas.

Generic pharma, spec pharma and biotech all did well last year. API, medical devices and biosimilars showed solid performance. In contrast, pharma services, animal health, CRO’s and diagnostic equipment companies underperformed in 2024

We looked at changes in value of the top 40 life sciences companies and can report that Eli Lilly managed to add $181 billion in value in 2024. Intuitive Surgical, AbbVie and Boston Scientific also delivered very impressive value gains.

The third best value add in pharma was from Pfizer which is well down the road to a turnaround. Strong value addition is also quite notable at BMS and Gilead. UCB, argenx and Sun Pharma are mid-sized companies that added tremendous value in 2024.

Novo Nordisk lost substantial value after its CagriSema clinical readout was disappointing.

Large caps did well thanks largely due to Eli Lilly which gained substantial value on the back of the obesity boom.

Microcaps did well but, in aggregate, picked up only $7 billion in total value. These stocks had been beaten down badly during the post-Pandemic period. 

Large Pharma and the Performance of the Tech Sector

In the last four years we have seen Lilly add $569 billion in enterprise value while Novo Nordisk added $248 billion. AbbVie added $183 billion in the same period while Vertex, AZ, Sun Pharma and Regeneron all added between $30 and $75 billion. The other nine large pharmas, in contrast, dropped $246 billion in value.

The story is obviously related to delivering great commercial results on obesity and immunology – the two major themes of today’s market.

Novo Nordisk didn’t perform well after CagriSema data last year. We see them coming back this year.

Our optimism on Novo stock stems from its CV portfolio which includes three Phase 3 trials underway for ziltivekimab for atherosclerosis and Phase 1 studies of an NLRP3 in CV and an ANPTL3. Zilti could be an absolutely massive drug if the trial hits.

We see Lilly continuing to perform this year. Lilly has an extraordinarily good pipeline with strength in both oral GLP-1’s and next generation obesity drugs. The free cash flow from this pipeline alone could exceed $500 billion. Further, free cash flow from tirzepatide could hit a similarly large value. Lilly seems to have fallen back a bit in Q4 2024. We don’t particularly see the rationale particularly given the rest of the pipeline, particularly their Lp(a) drug.

We also really like Merck’s position right now and can’t quite understand why their shares didn’t do better in 2024. Merck has a great CV pipeline, a monster product in WINREVAIR® for PAH, a strong vaccine portfolio, a very promising TLA1, an extraordinary set of ADCs from a partnership with Daiichi, a promising prostate drug from Orion and three newly in-licensed products from China (Curon’s TCE for autoimmunity, Lanova’s VEGFxPD1 bispecific and Hansoh’s GLP-1 oral). Merck has the clinical prowess to turn this pipeline into large sales.

AstraZeneca has publicly said that they intend to hit $80 billion in revenue by 2030. We think they have the pipeline to get there between their extraordinary strength in oncology, rare disease and cardiovascular. We like AZ’s oral GLP-1 from Eccogene a lot and note that they have a surprisingly respectable portfolio in the respiratory and immunology field.

Sun Pharma has a surprisingly strong position in emerging markets (#1 in India) and will be able to ride the growth in that region for years to come. Further, we really like Sun’s portfolio in North America and Europe and expect to see further growth ahead.

Big Pharma vs. Tech

The world’s top five tech companies are worth $14.8 trillion at the end of 2024. Compare this to $10.3 trillion at the end of 2023.

The world’s top five healthcare companies were worth $2.4 trillion at the end of 2024. Compare this to $2.2 trillion at the end of 2023.

Each of the top four techs are individually larger than the top five healthcare companies combined.

The gap widened in 2025 from approximately 4.6:1 to 6.3:1.

But the GDP contribution of healthcare is far larger than the GDP contribution of technology.

Fundamentally, the patent rules on drugs have led the healthcare sector to have lousy monopolies compared to those of the tech sector.

We think that the pharma sector will need to radically redesign its strategy to be able to gain substantial ground against tech company values. There are some interesting ways in which this can be done.

Determinants of Biotech Value

The most valued sectors in biotech today are in obesity, vaccines and B-cell immunology. We have seen substantial values drop in cardiovascular, gene editing and Alzheimer’s and strong value pick-ups in RNA therapeutics, protein degraders and oncology biologics (principally engagers).

The average preclinical biotech was worth $511 million three years ago. One year ago, that value had dropped to $125 million. As of last week, the value dropped further to $105 million. We saw a big drop in the value of Phase 1 biotechs in Q4 last year. Phase 2 biotechs held up well (this is where some of the stronger stories in the market lay). In contrast, Phase 3 biotech values fell quite a lot in Q4.

One of the distinctive characteristics of the biotech downturn of 2022 to 2024 has been an extreme quality premium. Companies with “very good” data have traded at a value of five to ten times companies with a “good” dataset. Investors flee to quality in tough times. In Q4 of 2024 the value of companies with “very good” data fell but held up relatively well given the strength of the downdraft in the market. Unfortunately, we saw a huge drop in 2024 among companies with no dataset. At present, the public markets a very tough place for a “biotech story stock” to live before it has produced clinical data. This is a complete turnabout from the Pandemic period.

Today, only 22.6% of U.S. public biotech value flows to companies with less than a “very good” dataset. Just 23 months ago, more than a majority of biotech value flowed to such companies. 

Is Chinese Sourced Innovation an Existential Threat to Western Biotech?

It’s not exactly a secret that the Chinese have gotten really good at biotech.

Chinese molecules became increasingly important in 2023 and 2024. At this point nearly a third of molecules sourced by big pharma through licensing deals are coming from China.

While the availability of Chinese molecules can be a boon for patients and large pharma, it is not a good thing for many Western biotech companies.

Chinese molecules are generally well designed and available to pharma at prices that are less than what it would cost to buy them on the biotech market.

We have spoken directly to multiple large pharmas and they have made it clear that they are comfortable buying molecules from China and appreciate the ability to save their shareholders dollars versus equivalent molecules sourced from U.S. or European biotech M&A.

Our own view is that this trend is just getting started. We spoke to Jeff Jay of Great Point Partners and he had this to say:

“I feel all the Phase I and preclinical compound deals being done with Chinese companies are very, very bad for the US VC biotech ecosystem.  It is even tougher to track the clinical progress of these compounds and they bite US private and public investors when data is released like being shot by a covert sniper. By our count, these Chinese licensing deals are almost half of the private pharma & large biotech licensing deals in number, up from close to zero ten years ago. These are deals that would otherwise be done with a US VC backed company focused on the same target. But they are done at about a third of the upfront money, generally are fast followers with better efficacy and milestones appear to be about a third of US VC deals.  The Chinese are delivering a better product at a lower price point.  I don’t think the VC community has figured out just how bad this is for them if this trend continues.”

We received further input on this topic from Brad Loncar CEO of Biotech TV:

“This China competition issue is real. Over the last year, $6B of licensing upfronts went to China companies for licensing deals…this competition did not exist before, and in prior years the money would have gone to XBI companies. Last year was just the start of that and if some kind of protectionism is not put in place, it's going to have a big effect on the future number of smaller type companies that exist in the U.S. and their chance of success.”
 

Our own view is that competition in biotech is going to accelerate in the years ahead and not go back the other way. It’s been with us since day one. Remember the jostling way back when between Genentech / Lilly and Novo Nordisk on recombinant insulin in 1976 or the battle between Genetics Institute (now part of Pfizer), J&J and Amgen over EPO in the early 1980s?

Chinese innovation is just part of a broader trend – the availability of great molecules from a wide variety of sources. Specifically, bear the following in mind:

Competition isn’t just coming from China. Competition for biomolecule development is broadly globalizing. For example, India is now getting into the game in a serious way. Glenmark’s Ichnos sub reported first-in-class data for a triple TC engager at ASH in December. We were wowed by the data. Wockhardt’s WCK5222 is one of the best molecules in its class. Zydus of India is now out ahead of Novartis and Roche in the NLRP3 space. They are planning to run a pivotal study in 2025 for their NLRP3 and they also have a PPAR that looks just as good as Gilead/Cymabay’s seladelpar.

The Chinese are moving quickly to build first in class innovation capabilities and are advancing fast in basic biologic science. The VEGF x PD1 idea, for example, started in China and China remains far ahead in this area.

The billions of pharma upfront money going into Chinese biotech are fueling more pipeline investment which will only heighten the competition.

Obviously, the value of a Western biotech has to come from doing something truly innovative really well. Not in being third or fourth to market.

Peter Kolchinsky of RA Capital expresses the following view on the topic:

“We don't see China meeting most of pharma's significant demand for assets. Certain kinds of modalities and targets are unique to companies. And being early in a race to market still counts. Those same Chinese companies are also a source of assets for us VCs to start US companies.”

Biopharma Capital Markets in 2024 and Going Forward

While it’s not 2021, 2024 ended up as the third most active year for biotech fundraising in history.

Importantly, 2024 biopharma follow-on volume was the third busiest in history.
 

Looking back, 2024 turned out to be the second most active in history for venture investments in biopharma companies.

The total volume of new money flowing into life sciences venture funds in 2024 was $22 billion, anchored by $3bn+ funds from Arch, Bain and Flagship.

While volumes were nowhere near the Pandemic levels 2024 turned out to be the fourth best year in history.

Overall, venture fund capital raising took a major step up starting in 2020 and has not reverted.

Happy New Year!

Tim Opler
Managing Director
Stifel Investment Banking
Direct Phone: +1 212-257-5802
oplert@stifel.com

Stifel, Nicolaus & Company, Incorporated | Member SIPC & NYSE | www.stifelib.com