It’s that time of year again. With 2024 at a close, healthcare investors, analysts, bankers, and management teams are finalizing their JPM meeting wish lists and preparing to migrate to San Francisco.
As teams navigate the flurry of data, pitches, and proposals, we expect the following themes to contextualize the majority of biotech discussions around Union Square:
- Impact of the New Administration
- Interest Rates
- The IPO Window
- M&A Activity
- The Obesity Market
Impact of the New Administration
Though the XBI reached a 2-year high following the 2024 presidential election, it rapidly sold off following the cabinet nominations of Kennedy for HHS and Oz for CMS. While these selections have raised concerns around potential agency disruptions and contributed to increased biotech volatility, investors continue to seek to better understand nominees’ priorities and parse political theater from true impact. While the impact of the IRA has been relatively modest to date, we await more clarity on any changes the new administration may make to its implementation, and the potential longer-term risks to the sector. On a more optimistic note, the nomination of Ferguson to lead the FTC is expected to result in a more business-friendly regulatory environment, potentially spurring more – and more expedient – biotech M&A. Together with the potential for further interest rate cuts, less resistance from FTC could result in a welcome tailwind for the sector.
Interest Rates
As inflation slowly cooled, the Fed cut rates on three occasions in 2024 – totaling 100 bps. However, as inflation remains somewhat elevated, the Fed recently signaled it will make just two additional 25 bp rate cuts in 2025 (two fewer than previously expected).
Given biotech’s high degree of rate sensitivity, sector stocks tumbled on the news, reviving concerns around companies’ ability to raise capital next year. That said, continued movement toward lower rates has the potential to provide a macro tailwind for the sector in 2025 and help encourage movement from the sidelines back into the equity markets.
The IPO Window
2024 marked the third consecutive year of a tighter IPO window, with a total of 22 IPOs year to date (20 in 2023, 18 in 2022, 108(!) in 2021). Conversely, of the companies that have waded into the public markets this year, average IPO deal size and valuation have increased since 2022, with the average 2024 deal size exceeding $150M and median market cap approaching $600M. Consistent with the heightened degree of selectivity around which companies should test the public markets for the first time, the proportion of IPOs representing preclinical-stage companies continued to fall in 2024, from ~30% in 2021 to less than 10% this year. And while oncology continues to dominate biotech IPO classes in terms of therapeutic area focus (representing ~30% of 2024 IPOs), it too is down from over 50% in 2021. Finally, performance of the 2024 IPO class has been weak, with the class currently down ~15% since IPO.
Given the mounting backlog of private companies waiting to go public, combined with the potential for improving macro trends, we believe 2025 has the potential to usher in a strong new crop of biotech IPOs. And given ongoing market volatility, we continue to expect many of these companies to explore a dual-track process in order to maintain flexibility and optimize valuations.
M&A Activity
M&A is the lifeblood of the biotech industry, but 2024 has been a lackluster year for deal value in the sector. While total deal volume (19) is fairly in-line with historical performance, total deal value sits at ~$30B, down from ~$140B in 2023 and at its lowest point in over a decade. The reasons for this downturn could be many, but high interest rates and a desire to wait for a potentially more receptive FTC may be among them. Companies most likely to be acquired in 2024 have been in Phase 2 or Phase 3, with a pivot away from commercial stage companies relative to 2022. Small molecule companies again represented the majority of deals, with a notable reduction in gene therapy deals (3 in 2023, zero in 2024). Filtering by therapeutic area focus, oncology, neurology, immunology, and rare/genetic diseases continue to account for the majority of deals, collectively representing over 60% of deals in 2024.
Despite a slow year for M&A in 2024, large biopharma companies continue to have robust M&A capacity, collectively generating ~$120B/year in deployable cash flow. Of this group, Pfizer and J&J boast the largest war chests ($21B and $20B, respectively), and multiple key players face significant upcoming patent cliffs. Taken together with the continued pace of innovation in biotech, we believe that deal flow has the potential to rebound significantly in 2025.
The Obesity Market
What 2025 biotech outlook would be complete without a word on obesity? While we remain in the early innings, the GLP-1 market is poised to become the largest in the history of our industry, projected to exceed $120B by the early 2030s. This forecast is driven by the massive unmet need in obesity and the growing appreciation of the myriad disease areas that have the potential to be addressed by this mechanism, including liver disease, obesity-associated cancers, and Alzheimer’s disease. As the obesity market continues to expand and evolve with over 75 programs currently in clinical development, we expect it to become increasingly difficult for large pharma players to suppress their appetites.
Conclusion
As the biotech community prepares to turn the page on a turbulent 2024 and gear up for a busy week of presentations, meetings, and inflated hotel charges, we hope you’ll also find time to reflect on what matters most and our collective privilege to help improve the lives of patients.
See you in San Francisco. If you are interested in meeting with Gilmartin in San Francisco to learn more about how we partner with companies, please contact our team today.
Authored by: Adam Bero, Managing Director, Gilmartin Group