The Impact of the Top 3 Strategic Imperatives on Global Biotech Investments

Geopolitical Chaos

Why

• Deglobalization and the US-China confrontation complicate biotech innovation sourcing and commercialization. The 2024 US presidential election and its effects on global and domestic policy worry the industry.
• Geopolitical tensions may reduce cooperation, disrupt the initial public offerings (IPO) sector, and impose financial penalties, thus, making economic forecasts unpredictable.

Frost Perspective

• To stimulate market expansion, the pharmaceutical sector will need to innovate by developing new platforms and techniques and enhance its capacity to withstand challenges through innovation and diversification.
• Biopharma companies with positive clinical trial results will suffer less from sluggish market dynamics because they will attract significant attention from investors and substantially increase their prices.

Disruptive Technologies

Why

• Public financing for biotech is uncertain, but venture capitalists have consistently invested significant amounts of money in groundbreaking technologies that have the potential to transform the industry in 2024.
• Financing has mostly gone to innovative platform technologies, including artificial intelligence (AI)-enabled drug development, cell and gene therapy (CGT), and messenger ribonucleic acid (mRNA).

Frost Perspective

• Precision medicine sectors will attract investors, such as the integration of extensive omics data sets, the exploration of regenerative treatments, and the unlocking of large-scale genetic alterations.
• Platform companies will need to consider expanding beyond rare illnesses and oncology to address other significant areas with unmet medical needs.

Innovative Business Models

Why

• Investing in external innovation accelerates and broadens pharmaceutical corporations' innovation pipelines while they search for alternatives for valuable drugs that may soon face generic competition. The industry-wide effects of this phenomenon are significant, evident in the increase in licensing partnerships to bolster pipelines.
• Early-stage investment fosters innovation throughout the ecosystem, improving chances for all players.

Frost Perspective

• The tough macro-environment and persistent uncertainty will compel dealmakers to explore innovative alternatives to achieve growth.
• Dealmakers will explore various strategies to achieve growth in 2024, such as licensing partnership agreements, joint ventures, structured deals for R&D financing arrangements, and spinoffs and divestitures.

Growth Drivers

• Big biopharma companies have recently realigned and divested their portfolios to free up funds and invest in their primary focus areas where they perceive growth opportunities. By extension, this is igniting M&A activity. Merck, GSK, and Novartis have been active in M&A this year after spinning out their consumer divisions. Merck paid $10.8 billion for Prometheus, and GSK paid $2 billion for Bellu. Novartis bought Chinook for $3.2 billion. J&J also has an M&A edge, as the separation of its consumer health business Kenvue gives J&J $13.2 billion in M&A cash from its IPO.
• Most big biopharma companies have strategic corporate venturing units that invest in life sciences start-ups. Externalization of R&D has allowed them to actively and assertively engage in the sector more than they could otherwise. They have learned to maximize economic value through optionality as investors. If a technology works, the corporate investor may be able to acquire it or get an early edge over rivals. Even without a corporate investor's goal to buy an invested asset, investors and key opinion leaders consider that helping firms across the ecosystem strengthens the industry, which benefits businesses. However, if a technology fails, the corporate investor can cut ties and focus on other inventions, often with only minor financial losses.
• Cash availability and the looming patent cliff push companies toward M&A. Many cases display this type of dynamic. For instance, Pfizer is still benefiting from COVID financial gains. Merck and AbbVie are profiting from their successful drug Keytruda and Humira, which are now facing biosimilar competition. All three companies are well-positioned for M&A. Novo Nordisk and Eli Lilly, with their upcoming GLP-1 windfalls, will gain substantial deal-making capabilities.

Growth Restraints

Biotech Investment: Growth Restraints, Global, 2024–2028

• Stakeholders are concerned about the potential impact of increased scrutiny from the US Federal Trade Commission (FTC) on biopharmaceutical innovation. The sector fears that regulations could hinder the ability of drugs to expand through company acquisitions by large biopharma companies. Additionally, the industry is preparing for a more demanding pricing environment because of the US Inflation Reduction Act (IRA), which will impact how the sector can leverage innovation.
• The global economic instability resulting from the ongoing Russo-Ukrainian War, trade disputes between the United States and China, and the persistent inflationary pressure because of COVID-19 has led to high interest rates that complicate small biotech companies’ survival. Decreases in funding have resulted in layoffs and downsizing. Nevertheless, the industry has made significant transactions throughout 2024.
• Biotech companies and investors face debt financing issues due to many factors, such as the Silicon Valley Bank failure. Early-stage biotech companies must review their liquidity rules and expand their banking strategy. The rise in interest rates has resulted in a decrease in debt funding. Additionally, less capital can be obtained through follow-on public offerings and IPOs. As a result, smaller firms find it difficult to obtain the necessary capital to reach their next value-creating milestone.