Pharma awaits Fed relief with $1T in firepower to spend on biotech innovation: report

Pharmas have a record $1 trillion to deploy on new biotech innovation deals. All they need is for the Federal Reserve to lower rates, according to a new report from Ernst & Young.

And that’s a big maybe. The market is mostly betting that there will be one decrease in the second half, but the rates are expected to remain the same in the near term, according to the CME FedWatch Tool.

But, if the pressure is relieved, biotech is poised for a comeback, according to EY’s latest Beyond Borders report published Monday.

“Despite the Federal Reserve delaying action on interest rates, biotechs still have grounds for continued cautious optimism," said Arda Ural, Ph.D., EY Americas life sciences sector leader, in a statement.

"The combination of record-level dealmaking capacity seen throughout 2023, firepower of Big Pharma and the healthy innovation capacity of the sector, including possibilities from artificial intelligence, will ultimately help the biotech sector to not only survive but thrive in the mid- to late-term." 

The pharma industry is hunting to replace $300 billion worth of products that are losing exclusivity, and that means companies need innovative new therapies from biotechs.

EY noted the tough two years of financing constraints that have pushed biotechs to massive layoffs and restructurings. But innovation has remained robust, according to the report, with the FDA approving 80 novel biopharma products in 2023, one of the highest totals ever.

“With the patent cliff for big pharma and uncertainty around the IRA, faith in innovation will be one of the key pillars in biotechs’ strategies for continuing recovery from the tough times experienced in 2022 and 2023,” said Rich Ramko, EY U.S. biotech leader.

“For now, financing is still catching up, and capital access remains an issue for many companies in the sector. However, biotechnology remains an innovation-driven industry, and innovation is thriving.”

While mRNA vaccines reigned during the pandemic years and autologous cell therapies were all the rage, cardio-metabolic products like GLP-1 receptor agonists have taken center stage as well as radiopharmaceuticals and antibody-drug conjugates

Going forward, EY sees IPOs returning on a selective basis below the historical average.

“Venture funding is anemic, the follow-on financings appear to have improved over the 2022-2023 period, yet at suppressed valuations. As a result, our analysis suggests that almost a third of biotechs do not have sufficient cash to sustain their operations over a year,” the firm said.

Venture financing was flat in 2023 at $18.9 billion, dropping from the pre-pandemic high of $47.5 billion. Early-stage venture investment dropped 8.7% in 2023 compared to 2022, bringing in $12.48 billion for early-stage assets.

Instead of M&A, pharmas have been doling out cash for alliances since the COVID-19 pandemic. Companies committed a total of $125.3 billion in potential value to partnerships in 2023. These deals provide lower-risk access to innovation, EY said. But M&A is on the rise, with a flurry of activity to start the year.