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Optimism for life sciences growth amid policy shifts in 2025

Photographic portrait of Arda Ural
Arda Ural, PhD

EY Americas Life Sciences Sector Leader

7 minute read 13 Dec 2024
Related topics
Tax
Consulting
Strategy and Transactions

How key innovation, technology, dealmaking and policy considerations are reshaping the industry’s future.

In brief

  • While patent expirations of $300b will continue to put pressure on growth, robust innovation likely will partially offset top-line erosion.
  • Pharmaceutical dealmaking in 2025 will benefit from eased Fed policy, normalized FTC oversight, and underlying pent-up demand for late-stage assets.1
  • Companies increasingly continue to adopt AI for R&D productivity, to lower operating costs and to enhance efficiency around finance and workforce.

After a somewhat uneventful year for the pharmaceutical industry in 2024, bright spots are on the horizon as 2025 approaches. While overall dealmaking in the sector was on par by volume with that of last year, dealmaking values have been lower in 2024 even though the year started with an optimistic sentiment across the industry. From a macroeconomic standpoint, the economy has improved and uncertainty around the US presidential election has subsided, yet new uncertainties and risks have arisen. Though patent losses are still looming for many of the largest pharmaceutical companies, innovation has been thriving and a healthier investment environment for the biotech innovation engine is emerging. Although it might be too early to definitively determine what 2025 will bring for pharmaceutical companies, prospects for the industry appear promising.

How EY can help

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The current state of the sector

Despite skepticism from the US populace, the nation’s economy is currently in a relatively better place than it was in the recent past. As of the third quarter of 2024, the US economy was growing at an annual pace of 2.7%, and unemployment remained historically low at about 4%. Meanwhile, inflation during the same period remained at about 2.4%, just above the Federal Reserve’s 2% target. Fed Chair Powell lowered interest rates in both September and November, thereby easing the cost of capital. Lower rates will help to service debts and lead to increased M&A.

 

The capital markets also reacted favorably to lower interest rates. By the end of the third quarter of 2024, the life sciences industry had announced 36 deals worth a combined total of $115 billion, according to EY analysis. While deal volume was up 8% from 2023, value was down by 23%, indicating the industry’s appetite for smaller, more strategic deals in 2024 (and reflecting lack of megadeals like the $43 billion Pfizer-Seagen acquisition, announced in 2023). Dealmaking has also shifted from de-risked late-stage assets to earlier, but less pricey, targets. Generally speaking, the $200 billion annual deal value is considered a historical benchmark to beat.

 

The initial public offering (IPO) window opened very slightly in 2024 after being largely shut for two years. There were 26 biotech IPOs as of the end of October 2024, raising a total of $3.25 billion and eclipsing 2023’s full-year total of $2.86 billion. Historically, 50 is the annual average benchmark for biotech IPOs. Trends in the IPO market are reflecting a move back to more traditional investment standpoints for biotech investors, with most IPOs being carried out by companies with mid- to late-stage assets that have been somewhat de-risked. Oncology companies comprised nearly 40% of newly public biotechs in 2024, underscoring the strength of this therapeutic area, which also leads in Food and Drug Administration (FDA) approvals.

 

Biotech venture capital (VC) investing in 2024 is set to outpace that of 2023. As of the end of October of this year, the sector had raised $17.3 billion on 453 rounds of investment, nearly reaching the 2023 full-year total of $18.4 billion. The VC environment is still a story of haves and have-nots, as VC investors infuse significant funds into private companies started by well-known management teams, while smaller, unknown biotechs struggle for capital.

 

Even as some of the financial metrics for the industry improve, established pharmaceutical companies face a $300 billion growth gap through 2028, as some of the best-selling biologics of the last decade lose patent protection. This growth gap is unevenly distributed — some companies that had major blockbusters in recent years are facing potentially steep declines in revenue, while others have more adequately prepared to fill those gaps through both internal and external innovation. With top-line revenue erosion expected for some of the largest organizations, a return to dealmaking will remain essential despite the lack of significant activity over the last three years.

What to expect in 2025

With the cost of capital coming down and the need for pipeline replenishment remaining ever-present, the dealmaking environment is due to pick up in 2025. If this trend around reduced interest rates continues, 2025 could bring megadeals for companies that are still seeking to fill the growth gap ahead of the large loss-of-exclusivity event in 2028, although most deals will likely continue to be the smaller, more strategic plays that we’ve seen in 2024.

As the deal market continues to evolve, the policy environment in the US is also shifting. Following the Republican trifecta gain of the White House and both houses of the US Congress, business leaders would be wise to spend early 2025 assessing how politics will drive policy.

On one hand, lower corporate taxes, overall deregulation (specifically, decreased scrutiny from the Federal Trade Commission) and potential rollback of the drug pricing provisions in the Inflation Reduction Act (IRA) will aid growth.

On the other hand, these favorable moves will be counterbalanced by potential tariffs as high as 60% on goods imported from China, 25% on those from Mexico and Canada, as well as 10%–20% on goods imported from other geographies. The costs to import finished pharmaceutical products and devices, active pharmaceutical ingredients (APIs), intermediates, excipients and packaging are likely to increase significantly. These tariffs would likely have cascading implications for supply chain and manufacturing operations.

Even if the IRA is partially rolled back, drug pricing reform is still in play. For example, President-elect Trump proposed a number of different pricing mechanisms in his first term that could still materialize after he assumes the office again in 2025.

Should the administration follow through with its proposed immigration policies, mass deportations of undocumented immigrants and additional law enforcement activities could impact the workforce overall. For the longer term, this activity has the potential to make it more difficult for highly technically skilled immigrant workers across pharma and MedTech to obtain visas.

There are also sector-specific implications related to the president-elect’s planned nominees for health-related agencies such as the U.S. Department of Health and Human Services (HHS), the FDA, and the Centers for Disease Control and Prevention. Robert F. Kennedy, Jr. has been tapped to lead the HHS. He has been widely criticized by the industry for his anti-vaccine stance and his critical views of the FDA. He has also expressed a desire to limit infectious disease research at the National Institutes of Health. Nonetheless, some industry watchers see him as a disruptor who could bring positive change to a space that needs some overhauling.

Martin Makary, a surgeon at Johns Hopkins, was chosen to lead the FDA. While Makary shares some views with Kennedy (particularly around vaccines and food safety), he has not faced significant criticism over his qualifications. If confirmed, he is expected to shake up how approvals are handled and the regulatory agency’s relationship with the pharmaceutical industry. At the same time, he is not expected to slow the pace of drug approvals.

Mehmet Oz, nominated to lead the Centers for Medicare & Medicaid Services, will be key in determining which products will be selected for inclusion in IRA-related drug pricing negotiations in 2025.

What should business leaders be thinking about

While much of the speculation around the new administration’s actions is merely crystal ball gazing ahead of President-elect Trump’s inauguration, there are steps life sciences business leaders can take to shore up their revenues and prepare their companies to approach the future with confidence in 2025 and beyond.

Businesses must increasingly embrace the use of new technologies such as generative artificial intelligence (GenAI) as use cases are becoming increasingly specific for productivity in commercialization and R&D, and to generate efficiencies for IT, finance and supply chain.

Increasingly, data and new technologies are key threads woven through all areas of a successful business. Corporate workforces must be upskilled to incorporate these new technologies into daily activities, and new highly skilled workers must be brought in to effectively manage AI integration.

Financial and operational resilience should also be key priorities. Financial resilience is the ability to predict sales, minimize costs, optimize capital, and streamline the organization and its operating model so that the business can reduce the impact of economic downturns and accelerate growth. Life sciences companies that build resilience into their operating model are less impacted by downturns and disruptions to the market.

Business leaders also need to work closely with their tax team as some of these policies take shape, particularly those regarding tariffs and trade policy. Domestic sourcing is expected to become a predominant strategy for US businesses seeking to mitigate the impact of tariffs. Yet, shifting supply chains and increasingly complex manufacturing operations can be both costly and time-consuming. In addition to domestic sourcing, industry leaders will need to consider country-of-origin planning (for China tariff mitigation) and customs valuation strategies.

This article was previously printed on Life Sciences Leader: Optimism For Life Sciences Growth Amid Policy Shifts In 2025.

Lisa LaMotta, Lead Americas Life Sciences Analyst, EY Insights, Ernst & Young LLP, contributed to this article.


Summary

While 2024 was another year of recovery and transition for the pharmaceutical industry, a potentially deregulated business environment, better economic circumstances and increased access to capital offer a promising start to 2025. To approach the future with confidence, business leaders must embrace technology and focus on operational resilience.

About this article

Photographic portrait of Arda Ural
Arda Ural, PhD
EY Americas Life Sciences Sector Leader
Co-author of numerous whitepapers and a frequent speaker about biopharmaceutical strategy at industry conferences. Married father of two.
Related topics
Tax
Consulting
Strategy and Transactions

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.