Biotech fields a political curveball
2024 was a very mixed year for the biotech sector – and uncertainty looks set to shape the industry’s next year too.
Biotech’s long time horizon, with a five- to ten-year drug development cycle, has been a disadvantage in a persistently high interest rate environment. The industry is still digesting the to the complex impact of the Inflation Reduction Act on drug pricing. Now the incoming U.S. administration raises further uncertainties.
While the Republican sweep had been universally seen as favorable for biotech, a slate of unconventional healthcare leadership nominees came as a curveball for the sector, says Brian Abrahams, Head of Global Healthcare Research at RBC Capital Markets.
“An anti-establishment tone, if it were set from the top, could espouse public mistrust in western medicine, reduce screenings and utilization, and also weaken public health initiatives around things like vaccinations,” Abrahams warns.
After several years of steady drug approvals, regulation may change too. Incoming Food and Drug Administration Commissioner, Dr Marty Makary, has a history of anti-biotech stances and is seen as a net negative for the sector, says Abrahams. However, he notes that many biotechs are sanguine, seeing Makary as a credible appointment with a primary focus on food safety.
The departure of Vivek Ramaswamy from the new administration may be a disappointment, however: “I sensed investors and people in the industry had viewed him as providing a kind of backstop in the face of potential cutbacks.”
Pricing power endures
No matter how those factors play out, biotech’s fundamentals remain solid, and success stories continue to be rewarded with substantial stock appreciation and capital access. Sentiment among investors has become gradually more optimistic over the past six months, Abrahams notes.
“We’re still hearing companies are able to get good pricing power without a ton of payer pushback as they launch new drugs, particularly in rare diseases,” he says. “They’re also able to increase prices of more mature therapies to sustain growth.”
He predicts the best opportunities will emerge in three categories: commercial-stage companies that are undervalued following exaggerated downside moves in the market; potential M&A targets; and companies with under-appreciated near-term upside catalysts, grounded in sound rationale and prior data.
“Companies are able to get good pricing power without aggressive payer pushback as they launch new drugs, particularly in rare diseases.”
Brian Abrahams, Head of Global Healthcare Research
Advances roll on in multiple fields
Technologies and therapies to watch in 2025 include next-generation oncology, such as treatments designed to target cancer cells more specifically to avoid side-effects.
There will be efforts to refine the GLP-1 success story in obesity, says Abrahams: “How can we find better-tolerated and more convenient options, either as replacements or as add-ons?”
There are also rapidly advancing novel treatments for conditions including Huntington’s disease, depression, and epilepsy, and increasing interest in large-market spaces such as cardiovascular disease, pain relief, and rheumatological disorders.
“The launches of new Alzheimer’s drugs have been slower than anticipated, but that could pick up as doctors get more experience and the agents become easier to administer,” Abrahams predicts.
The stage is set for M&A revival
Deal flow was slow in 2024, but the announcement of Johnson & Johnson’s near-$15 billion purchase of Intra-Cellular Therapies set 2025 off with a bang. Abrahams says M&A could continue to pick up, bolstered by a more permissive Federal Trade Commission.
RBC calculates that large biopharma companies have over $350 billion in annual sales at risk over the next decade due to patent cliffs. At the same time, they have over $150 billion in cash on their balance sheets, which is likely only part of the firepower available to them.
“The stage is set for more deal activity,” Abrahams says. “Thirty-day premiums on deals have been getting higher, peaking at 120% this past year – so finding those takeout targets has proven fruitful.”
One potential threat is the growing pharma trend for in-licensing or partnering of Chinese assets. “Some worry that cheaper assets coming out of China could undermine values of some of the innovative U.S.-listed small and mid-caps,” Abraham adds.
Despite the uncertainties, biotech remains an exciting investment opportunity. “There are a lot of unknowns, but a lot that could move the needle if you find the right stories with the right teams, underlying science, clinical development approach and commercial prowess,” he concludes.
“30-day premiums on deals have been getting higher, peaking at 120% this past year – so finding those takeout targets has proven fruitful.”
Brian Abrahams, Head of Global Healthcare Research
