Against an increasingly uncertain market backdrop, industry analysts EY said they are keeping an eye on potential pharmaceutical tariffs, tax rates and any drop in interest rates as key signposts for the sector's health.
With these variables yet to be determined, analysts at EY said they had difficulty assessing trends and coming up with projections in their 35th annual "Biotech Beyond Borders" report.
“This is probably one of the toughest years to predict and set the tone for how innovation is going to transpire over the next six months to six years,” Arda Ural, Ph.D., EY Americas Life Sciences Sector Leader, said on a conference call last week.
Geopolitical factors must also be factored in, especially those in China, according to Ural. The country is emerging as a “source of innovation in ways that we haven’t seen before," he explained
The uncertainties have exacerbated an already constrained investment environment, which is evident in the biopharma industry and beyond, with U.S. real GDP falling by 0.2% in the first quarter of 2025.
“This is not a time for making bold predictions, as they don’t age well,” EY wrote in the report. “However, in any changing environment, there will be opportunities for the bold. Companies with de-risked assets will continue to tap into capital from Big Pharma companies with formidable firepower and there is potential for M&A to thrive once uncertainty lifts.”
Given those same uncertainties, EY’s advice to decision-makers is to stick to the fundamentals. Pre-revenue companies should allocate resources carefully, cut costs and prioritize their most promising assets so they can reach the next inflection point. With an eye on policy changes, revenue-generating firms should be examining their supply chains, manufacturing networks and the composition of their workforces.
In these areas, artificial intelligence can provide “immense productivity gains,” EY wrote.
“AI is here to stay and is rapidly reshaping the way industry does business,” the analysts said in the report.
Biotech landscape
Last year was a “mixed bag” for biotech, Ashwin Singhania, EY’s Principal, Life Sciences Strategy, said on the same call. While revenues were up 7% last year and R&D spending increased 12%, the industry headcount was down 5% as companies cut programs and conserved cash, according to EY.
“We now have about 40% of public biotech companies operating with less than a year’s cash,” Singhania said. “And all of this is because it’s a really tough funding environment.”
Overall biotech financing decreased by 10% in 2024 to $73 billion and slipped even further in the first quarter of this year, with a year-over-year decline of 17%. Additionally, while early-stage funding was up 10% last year, the number of early-stage deals was down 20%, providing more evidence that investors are placing larger bets on fewer assets as the sector increasingly becomes a story of the haves and have-nots.
For example, in 2019, there were a total of 961 funding rounds at an average size of $21 million. In 2024, there were 644 funding rounds averaging $36 million.
“VCs seem to be saving their dry powder for their best companies, for their best products,” Rich Ramko, EY Americas Life Sciences Sector and Biotechnology Leader, said on the call.
The good news, according to Ural, is that the “fundamental underlying technology and quality of science is still there.”
But the challenge for investors, given the uncertain economic environment, is in making accurate valuations of companies.
M&A trends
Under the marching orders of former President Joe Biden late in his term, the FTC moved to thwart several M&A deals, EY said. The analysts added that some medium-sized acquisitions, which had the potential to give a company pricing power for a class of drugs, were also derailed by the regulators.
The ratcheted-up FTC scrutiny—which the Trump administration surprisingly has ordered to remain intact—has been reflected in the deals that have been made over the last 18 months.
In 2024, there were 54 deals involving pharma and biotech companies, which accounted for a total value of $77 billion, making the average transaction worth $1.4 billion. Compare that to 2023, when 61 deals were made for a sum of $153.5 billion, which works out at an average of $2.5 billion per transaction.
Instead, the industry went heavy on alliances in 2024, EY said, citing 220 deals carrying a whopping $144 billion in biobucks, which is the highest combined value for the industry in a decade.
“This trend means that pharmaceutical companies are placing most of the value on clinical or regulatory milestones,” EY wrote. “These deals are weighted in pharma’s favor and mean small biotechs risk access to funding should they experience a clinical misstep.”
EY also noted a surge in dealmaking activity involving China, with 40 alliances formed with Chinese biotechs in 2024, which was the same amount as the previous year but for a higher value at $31.5 billion versus $24.3 billion in 2023. The trend has accelerated this year, with 13 more alliances struck in the first quarter totaling $18 billion in biobucks.
Despite the trends, there is ample reason to expect M&A activity to eventually surge—though not immediately as volatility remains due to potential policy changes.
For one, the industry’s top 20 pharma companies have a massive stockpile of cash, estimated at a combined $1.27 trillion at the start of this year, according to EY’s annual firepower report. And the drugmakers have considerable reason to seek inorganic help as they face a growth gap of more than $300 billion in revenue through 2028 due to oncoming patent expirations for several of the world’s best-selling drugs.
“There is no reason to think that M&A and collaborations aren’t going to accelerate once some of this uncertainty abates,” Ramko said. “And that will have a trickle-down effect. You’ll see valuations hopefully go up. You’ll see investors start to get a return of capital and invest in new companies again and it should open up the IPO market as well.
“There’s a lot of good companies out there that are waiting it out,” he added. “It’s a matter of when, not if.”
When will uncertainty subside?
Ural is looking at three macro milestones that will guide industry decision-makers, freeing them up to conduct business.
The first concerns tariffs. Section 232 of the Trade Expansion Act—which allows the President to levy tariffs based on national security—is currently under review. The findings from the investigation will determine whether Trump has the power to levy tariffs on pharmaceutical products. While the deadline for the review is 270 days from when it was initiated in April, Trump has indicated that pharma tariffs are coming "very soon."
The second milestone could be the September meeting of the Federal Reserve, where there is speculation that interest rates could be reduced.
“IPOs are correlated inversely,” Ural said. “Lower Fed rate leads to increased IPOs.”
There were 30 biotechs that went public in 2024, which was an increase from 2023. But biotech IPOs are still way down from their average of 54 annually from 2010 to 2020. A lowering of interest rates in September 2024 did not provide the spark for public listings that was expected, with the “IPO backlog” continuing to increase, EY said in its report.
The third matter of uncertainty, according to Ural, is the tax bill, referred to by Trump as his “big, beautiful bill,” which has been passed by the House of Representatives and is now before the Senate. If there are favorable tax rates for corporations, “your cash is ready to be deployed,” Ural said.
“You have the tariff, the Fed rate and the tax bill. 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 said.