Interest rates, IPOs, China, or Trump: What’s keeping investors up at night?Interest rates, IPOs, China, or Trump: What’s keeping investors up at night?

It is no secret that the financial markets have suffered over the past few years, with the biotech sector hit particularly hard. Funding post 2020/21 seemed to dry up, causing repercussions across the drug development chain that is still being felt today. And while biotech indices have generally rebounded from some of the lows seen in 2022 and 2023, there remains “a sense of anxiety” among investors, according to William Blair analyst Kevin Eisele.

Speaking at the AGC Biologics CMO Summit in Seattle, Washington last month, he reflected on how federal policy and a mixed set of clinical updates had helped lift spirits and the mood in the biotech capital markets – at least in September 2024 – was generally “sunny.”

Roll on four months, and the disposition has shifted as slower-than-hoped recovery meets an ever more tempestuous political outlook. The biotech index (XBI) has dropped 10-15% since September, thus, with data from a William Blair investor survey, Eisele reflected on “what is keeping investors up at night right now?”

Firstly, Eisele highlighted how traditionally sectors perform better in low interest rate environments. And while the US Federal Reserve encouraged a series of drops in interest rates through 2024, “expectations for rate cuts by the Fed over the next 12 months have dwindled to basically just one to two, with many expecting no rate cuts at all,” he said.

Secondly, the change in US administration has raised major concerns among investors. At the time of Eisele’s presentation, “potentially disruptive” nominations were being put forward with vaccine-skeptic and alternative health advocate Robert F. Kennedy Jr.’s position as head of the Department of Health and Human Services (HHS) the most significant for this sector.

“There are a lot of investors questioning, ‘what does the outlook look like? What's going to be impacted? Are vaccines going to get abolished? Is he going to come after other sectors of the biotech market, or is he solely going to be focused on food?’ Again, a lot of unknowns.”

RFK Jr. has since been confirmed, amid a deluge of executive orders, tariff threats, and federal government layoffs that could have repercussions in the biotech space. At this time, none of the above questions have been answered but such instability is unlikely to be great for investment.

The third concern in biotech is the lack of M&A present in the space. “Acquisitions are important, not only for pharma companies to continue to build out their revenue pipelines, but importantly for investors as well to recognize liquidity and be able to recycle that capital back into the ecosystem, into earlier stage opportunities,” said Eisele.

“Last year was a pretty anemic year for acquisitions,” said Eisele. Though a handful of Big Pharma acquisitions were announced at the JP Morgan conference in January – J&J’s acquisition of Intra-Cellular for $14.6 billion stands out among the other billion-dollar-plus deals from GSK and Eli Lilly – a continued lack of public M&A will add to the trepidation in the market.

Furthermore, the public funding side remains a concern, with questions arising as to when initial public offerings (IPOs) will recover?

“There were more last year than the year before, but it's still pretty slow. And when you take a look at the 10-year historical average, they haven't performed very well, and so that's caused a lot of consternation in the market.”

A shining light is that since Eisele’s presentation, there have been five IPOs in the biotech space: Ascentage Pharma raised $126.4 million, Metsera raised $275 million, Maze Therapeutics raised $140 million, Sionna Therapeutics raised $191 million, and Aardvark Therapeutics raised $94.2 million. At the time of going to press, three of these now public companies are floating above their IPO price (check out the BioPharma Dive IPO Tracker here).

The final threat to investment comes from China, particularly in terms of its growing role as an innovation engine for the West. Over a third of innovative molecules filling Big Pharma’s pipelines were sourced from China, said Eisele, with China-developed drugs driving over $3 billion in upfront value in 2024.

“Assets are getting acquired by large pharma companies, or companies being built around in licensed assets from China,” he said. Some recent large pharma partnering deals in China include Merck & Co. and LaNova ($588 million upfront), Novartis and Argo Biopharma ($185 million upfront), and AstraZeneca and CSPC ($100 million upfront). Select asset acquisitions include Merck & Co. buying a Phase I/II bispecific from Curon for $700 million, and GSK’s $300 million acquisition of Chimagen’s T-Cell engager.

“It's not just something that's impacting the biopharma segment but has impacted the tech sector and the AI sector as well. So certainly, that’s something that's top of mind for a lot of investors.”