Capital flow in the biotech sector has been under pressure with macro factors in the US on tariffs, tax & monetary policy, and drug pricing reforms contributing to uncertainty. But will the tide turn?  

By Patricia Van Arnum, Editorial Director, DCAT, pvanarnum@dcat.org 

Macro factors impact capital flow 
Biotech companies are an important source for innovation and product development for larger companies and are an important customer base of CDMOs/CMOs. Capital flow in the biotech sector, an important barometer of the financial health of the sector, has been under pressure with macro factors contributing to uncertainty. So where does the industry now stand? 

“Biotech financing has been under pressure for the past two years—it’s not new– and our sense is that it will continue for the next several months as well until some of the macro issues settle down and we have a better line of sight,” said Arda Ural, EY America Life Sciences Leader, Ernst & Young (EY), who shared his insights in the latest episode of DCAT Value Chain Insights’ Production to Prescription podcast. “This is probably one of the most unprecedented times in terms of so many external things coming together and giving an environment where there is no playbook.”  These external factors including changing trade/tariff policy, uncertainty over interest rates and the cost of capital, potentially changing corporate tax policy, and drug pricing reforms.  

The first variable relates to non-dilutive funding, which refers to capital raised without giving up ownership (equity), and which is an important source of funding to biotech start-ups. Government funding is the largest source for non-dilutive funding, and it has come under recent pressure in the US, with actual and proposed cuts to research funding, including funding for the National Institutes of Health, the largest single funding source of biomedical research. In the proposed Presidential Fiscal Year (FY) 2026 Budget, of which further details were released last Friday (May 30, 2025), NIH’s discretionary budget was reduced by $18 billion, or 39%, to $27.5 billion, compared to FY 2025 discretionary budget levels of $45.5 billion. These cuts, which have to be reviewed and approved by Congress, in part reflect a proposed reorganization of NIH by consolidating the now 27 institutes into eight, which includes retaining the National Cancer Institute, the National Institute of Allergy and Infectious Diseases, and the National Institute on Aging and streamlining the other institutes into five other institutes. 

Dilutive funding, the major source of biotech funding, is also under pressure. Dilutive funding occurs at different stages of a company’s maturity and involves the sale of a company’s ownership (equity) to investors and includes funding from angel capital (i.e., seed funding), venture capital (early-stage funding), private investment in public equity (PIPE), initial public offerings (IPOs), and follow-on offerings, all of which face downward pressures, fueled in part by investor uncertainty relating to key macro issues. .  

“On the dilutive capital side, funding has also been fairly subdued,” says EY’s Ural. “While investors have the funds, there has been some hesitancy due to fundamental existential questions on how to value assets,” he says. He points to several external factors such as uncertainty about interest rates and the cost of capital, the impact on product assets relating to drug pricing in US, those now in effect under the Inflation Reduction Act (IRA) and proposed measures such as most favored nation drug pricing, as well as overall economic and market volatility due to evolving US trade policy and other macro factors.  

“The primary question from the market is what is the valuation pre-money and post-money?,” says EY’s Ural. “What am I [as an investor] actually investing in and how am I going to justify that valuation down the road? If you cannot really predict the cost of capital and the upswing on the upside, the total peak value of the asset is going to be hard to predict. If it’s a small molecule, for example, will the so-called pill penalty under IRA provisions affect that asset throughout the course of the life cycle of this investment? So there are really fundamental existential questions  on how to value assets.” 

Biotech capital flow: where it stands 
Led by strong capital flow in 2020–2021, when high demand for therapeutics and vaccines to treat COVID-19 attracted investment dollars into the biotech sector, dilutive capital flow reached a recent high of approximately $25 billion to $28 billion per quarter, which was above historical norms. Over the last two to three years, those highs have since subsided to approximately $10 billion to $12 billion per quarter, with the exception of the beginning of 2024, when there was some bounceback, which did not hold. In 2024 to 2025 to date, venture capital flow into biotech has been approximately $5 billion to $7 billion per quarter, and PIPE, which was up in 2024 has since gone down to historical levels to approximately $2 billion to $3 billion per quarter.  

With regard to venture capital, Ural explains that it has been a “tale of two cities” or a bimodal distribution on how venture capital has flowed into the biotech sector. On the high end, entrepreneurs/start-ups that made successful exits over the past five years have received fairly sizable Series A financing (i.e., the first major round of venture capital financing that a start-up receives, usually after initial seed or angel investments), but that has been the exception rather than the rule. Also, companies with artificial intelligence (AI)-enabled drug discovery and development were favored by investors. “So, there were pockets of hope,” says Ural, “but in general, the industry remains subdued.” 

With respect to IPOs, the biotech sector reached recent highs of 64 in 2020 and 108 in 2021, well above median historical levels of 54 IPOs per year. IPOs retreated from that level most recently, with 17 IPOs in 2022, 16 in 2023, and an improvement to 26 IPOs in 2024, but in general, the IPO window has remained limited.   

EY’s Ural points out that interest rates are one of the most important correlations in projecting the level of IPO activity. “If the Fed  [US Federal Reserve] starts bringing down their rates, I think that may have a positive impact on IPO activity,” says Ural. “But for the foreseeable future, for the rest of 2025, you do not see that IPO window opening, it’s going to stay shut. But 2026 is a different story.” 

A look ahead for the rest of 2025 and 2026 
So what does the rest of 2025 and 2026 hold for capital flow into the biotech sector? “For the rest of 2025, I think we are at an interesting inflection point, with three key milestones to consider for the macro environment to turn positive,” says EY’s Ural.  Evolving US trade policy, in the form of tariffs, is one key variable, with the lessening of tariffs, potentially providing positive reactions by investors although tariffs under consideration remain above historical levels. To date (as of June 3, 2025), the US situation on tariffs continues to remain in flux.  

As it stands now (as reported on June 3, 2025), the US government has imposed a baseline tariff of 10% on US imports and two additional sets of tariffs impacting the bio/pharmaceutical industry are under consideration: (1) reciprocal taxes, which are imposed on a country-by-country basis and (2) specific pharmaceutical industry tariffs. The reciprocal tariffs were set to go into effect in early April (April 2025) but were paused until July 9, 2025, to allow US trading partners to negotiate with the US government. That process took a turn late last month (May 2025) as a US federal appeals court temporarily paused a ruling by the US Court of International Trade that had ruled that the Trump Administration did not have legal authority to unilaterally impose tariffs on US trading partners. Additionally, a trade deal with China, which had lessened import duties between the US and China has come under pressure from both sides.  

The second variable is whether the US Federal Reserve will act to cut interest rates, which will be determined in part by the tariff situation as uncertainty and the levels of  tariffs contribute to inflationary pressures. A key question is whether the trade environment will improve to motivate cuts in interest rates as inflationary concerns ease.  

 A third variable is on the US legislative front with the renewal of the Tax Cuts and Jobs Act (TCJA) of 2017, which had set the corporate tax rate at 21%. Although that corporate tax rate is not set to expire, other tax provisions impacting businesses under TCJA are set to expire at the end of 2025 and the overall corporate tax rate is subject to Congressional negotiation. As of now (June 3, 2025), a measure to keep the corporate tax rate at 21%  was passed in the US House of Representatives as part of an overall budget and spending bill, and that bill is under consideration in the US Senate. Keeping the corporate tax rate of 21% as opposed to going upward would be a positive indicator for businesses overall and for the biotech sector specifically.  

For the biotech sector, including smaller companies, these variables and the uncertainty they create obliges a different strategic focus to attract investment dollars. “A small pre-revenue or emerging biotech company, for example, needs to be very focused on what asset they are putting their resources behind,” says EY’s Ural. “A couple of years ago, [the focus] was on the platform a company had and then product was there as a point showing proof of concept. But now, for platforms, while they have been helpful, companies need to double down on a product focusing on thier lead assets—lowering your burn rate, consolidating your portfolio, tightening your balance sheet,” he says. 

 “For larger companies, the key is on scenario planning on tax, tariffs, pricing, if most-favored-nation pricing comes into play,” says EY’s Ural.  “What is the scenario that you will be using? It is not just the scenario itself, but the scenario planning. That is the key point to underscore.” A final factor for larger companies to consider in the current market, he points out, is potentially more favorable valuations and pricing of assets that previously may have been out of range but now could be more attractive investment options. 

Listen to the full interview with Arda Ural, EY America Life Sciences Leader, Ernst & Young (EY), in the latest episode of DCAT Value Chain Insights’ Production to Prescription podcast, which features thought leaders with expert views on the major happenings impacting the global bio/pharmaceutical industry.