While the year started out as cautiously optimistic, stemming from the peak of biotech initial public offering (IPO) activity in November and several merger and acquisition (M&A) announcements at the JP Morgan conference in January, this optimism has dwindled due to ongoing dips in the major stock indexes, among other uncertainties.
Following an unpredictable first quarter, the biotech funding landscape continues to be in limbo with recent disruptions to the National Institutes of Health (NIH), expected changes to how the US Food and Drug Administration (FDA) evaluates new drugs for approval and increasing global competition for new drug development. These challenges within the biotech landscape extend to the Alzheimer’s field as markets do not embrace instability, leaving investors to take a cautious approach while waiting to see how the new administration’s recent policy changes and widespread funding cuts will affect the broader healthcare and biotech ecosystem, including the neurodegenerative disease space.
Importance of interest rates
The uncertainty in the markets and future inflation cast doubt on the Federal Reserve’s (Fed) announcement on the two reductions in the Federal Funds interest rate for the remainder of the year. Ambiguity with interest rates will likely slow the pace of additional investment activity. The biotech market is extremely sensitive to this rate, making it critical to shape the sector’s investment performance. Alzheimer’s therapies are inherently risky investments, but lower interest rates may entice investors to move funds into more risky assets in search of a potentially higher return. Both the M&A and IPO markets are positively impacted in a low-rate environment as borrowing costs come down and investors increasingly turn to equities. Investors will closely monitor the timing and degree of any interest rate change as they evolve their 2025 strategy.
M&A and IPO activity
We expect to see continued M&A activity in the Alzheimer’s space with the growing ageing population and high prevalence of neurodegenerative diseases, creating an ever-growing demand for new treatments.
The recent approvals of Leqembi and Kisunla are also key factors in persuading several pharma companies to either return to the neuroscience space or expand on their existing pipeline. Sales for these drugs will help inform additional M&As in the Alzheimer’s space throughout the remainder of 2025 and into 2026.
Consolidation among smaller biotech companies is needed, and the time is now, given current volatility and the lack of clarity related to venture capital (VC) or public market funding. Over 200 of the 700 publicly traded biotech companies are trading below their net asset value, and many are on the verge of bankruptcy, making it a prime time for M&As as valuations are coming down for small companies. Companies that still have cash, but failed products, are grappling with whether to liquidate and return the cash to investors, or continue with second or third assets, or consider a merger or reverse merger. The valuation of companies in the public markets right now is lower than those in the private markets, further enhancing the possibilities for consolidation.
We anticipate that the IPO market will remain stagnant throughout 2025, as evidenced by the first quarter (Q1). This year, there have been five IPOs compared to eight IPOs in Q1 last year. Of the five IPOs for 2025: Maze Therapeutics – genetic medicines; Ascentage Pharmaceuticals – cancer; Metsera – obesity; Sionna Therapeutics – cystic fibrosis and Aardvark Therapeutics – obesity) four are currently trading below the issue price.
The popularity of venture capital (VC) ‘mega rounds’ also accounts for a slower IPO market, as these rounds allow companies to delay IPOs. The poor performance of biotech companies in comparison to the broader market is another determining factor. The average annual return on Biotech XBI was a loss of 1.47% over the last five years versus the S&P 500, a market index, which is up 14.3% annually over the last five years. Currently, the only way to have profited in the biotech space is by selecting the ‘outperformers’ rather than investing in the broader biotech sector.
Of the last 20 biotech IPOs, 18 are trading below their offering price, and on average, stocks are down 49.8%. That means investors who invested in the last 20 biotech IPOs have, at least on paper, lost half of their initial investment.
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