Biotech Investor Sentiment Climbing Steadily, with Growing Enthusiasm Heading into 2025

Barbara Ryan, Founder, Barbara Ryan Advisors

The biotech XBI index has broken out from a four-month narrow trading range with a deciding win for President-elect Trump, an initial rate cut of 50 basis points, and the more modest cut of 25 yesterday. The recent strength in macro data, and outlook for inflation, has investors in a wait and see mode on when/if and how much rates might fall from here.

Investors look to M&A as the most likely path to higher valuations in the sector. Lundbeck’s recently announced acquisition of Longboard for $2.5 billion is clearly a positive, but the fact is we are still well off of last year’s pace; at 10 deals over $1 billion thus far in 2024, vs. 20 last year. That said, eight of the 20 deals last year came in the fourth quarter and six of them came in December, so investors are hoping for a strong fourth quarter.

According to EY, the largest pharma companies now have a record $1.6 trillion to fund M&A and as most are approaching large patent exclusivity losses, which will create a growth gap; acquiring external innovation will be necessary to achieve targeted growth expectations.

With Trump now having decisively won the Presidential election, the biotech sector has traded up to recent highs, despite a bit of concern/uncertainty surrounding the potential for Robert F. Kennedy to play a significant role in influencing the FDA and CMS. According to an analysis by Brian Gleason, managing director at Raymond James, and his team, biotech investors are having a solid year with most crossover investors ahead 15% (in a range of down 12% to up 28%)—lagging the S&P 500, which is trading near all-time highs with a gain of 22% year-to-date.

Raymond James’ recent survey work indicates "sentiment continues to be steady with the vast majority of investors:"

1. More bullish on biotech vs. beginning of the year.
2. Believe generalist capital is either beginning to return or will return in 2025.
3. View the Presidential election largely as a non-event for biotech.
4. Believe that issues in the IPO market during the first half of 2024 were primarily related to companies going public too early.
5. That the shift in acquisition volume to more clinical stage companies is a function of higher quality post-POC assets and pharma wanting to acquire prior to valuations getting too rich.
6. Are currently most focused on rare disease and targeted oncology opportunities and less in CNS and metabolic disease.
7. Believe that the market has become asset -centric in terms of how biotech companies are evaluated.

The IPO market reemerged this year with positive momentum. The post Labor Day IPOs are all trading above launch price with a median performance of 25%, according to Gleason. Several more are expected before year end and it is anticipated that 2025 will be a busy year.

Capital raised so far this year remains on pace to approach record levels achieved in 2020, with 199 transactions priced with an aggregate of gross proceeds of roughly $35 billion.

A continued high level of innovation underpins the flow of capital into the sector and the positive performance.

The biotech market remains a tale of the “haves” and the ”have-nots.” According to Tim Opler, managing director, Stifel Investment Banking, the population of $1 billion-plus biotechs (“the haves”) has doubled this year, while in contrast, the population of “have-nots” with market caps of less than $100 million has fallen only slightly. The sixty-four percent of biotech companies(about 125) with market caps of less than $100 million (“micro-caps”) remain undercapitalized with less than 12 months of cash. These companies are potential merger partners for private companies seeking a public vehicle. It is encouraging that aftermarket performance of these reverse mergers has been positive—with 10 of the past 12 successfully closing on a PIPE (private investment in public equity) in excess of $40 million. Strategic reviews, restructurings, and liquidations have also become pervasive among this group, and these trends are expected to continue.

In SMID cap, generally restructurings and cost cutting announcements are historically high, with 81 new initiatives already this year.

Barbara Ryan is Founder, Barbara Ryan Advisors, and a member of Pharm Exec's Editorial Advisory Board