How will macroeconomic trends impact IPO activity and valuations in 2025?

If Fed rates continue to decline throughout 2025, historical patterns suggest a rebound in the IPO activity. A typical benchmark for IPOs is around 50 per year, but 2024 has seen only 26 in the first three quarters of the year. The outlook for IPOs in 2025 seems positive.

Valuations depend on factors beyond discount rates, but historically, lower Fed rates support higher equity valuations. This creates a favorable environment for IPOs, particularly in biotech and pharma. The Biotech and Pharma ETF indexes reflect pent-up valuation potential influenced by election outcomes and anticipated Fed rate cuts. A sustained high-valuation environment will likely attract more IPOs. The macro picture includes tailwinds such as declining rates, a peaceful transition of power, and evolving FTC policies. How will artificial intelligence help the industry overcome the patent cliff?

The loss of exclusivity (LOE) wave will remain a critical industry topic through 2028 when the impact of the LOE is expected to reach 6.7% of revenue and an estimated US$300 billion lost.

AI and machine learning could be the industry's next breakthrough opportunity. R&D expenses rose from 11.8% of revenue 20 years ago to 18% today, eating into margins. SG&A expenses have remained stagnant at 28% over the past decade, highlighting inefficiencies. AI offers opportunities to reduce costs and enhance productivity through AI-enabled drug discovery and development, potentially driving both top-line growth and bottom-line efficiency. Early AI-discovered products are already in development, with FDA collaboration underway. Whether AI can fully address the pipeline imbalance remains to be seen, but it represents the industry's best shot at innovation and recovery. How are advancements in oncology shaping the future of therapeutic innovation?

Over the past five years, oncology dominated funding, attracting US$250 billion—more than the combined investments in immunology, rare diseases, CNS, and neurology. Oncology benefits from easier reimbursement pathways and its life-saving therapeutic impact, making it a clear priority. Innovation in oncology has been driven by advanced modalities like antibody-drug conjugates, bispecific antibodies, radioligand therapies, and the evolution of cell and gene therapy. While cell therapies like CAR-T were traditionally focused on non-solid tumors such as myeloma, recent data show potential in solid tumors and autoimmune diseases like lupus and myasthenia gravis. This marks a significant advancement in cell and gene therapy. For all the industry Prescription Drug User Fee Act (PDUFA) projections for 2024 align with the historical median of 60 approvals annually over the past decade. We estimate 62 approvals in 2024, provided no unexpected disruptions occur, signaling steady progress in therapeutic innovation. How can biotechs adapt to financial pressures and innovation challenges to sustain growth?

Many companies in the sector face the need to optimize their portfolios. While in-house pipelines are necessary, they are not sufficient at current levels, forcing firms to buy innovation. Historically, 70% of the top 10 best-selling products originated from external sources, highlighting pharma's heavy reliance on biotech. Biotechs, however, have struggled financially over the past two years. The "sugar high" of 2021 led to premature IPOs, often without products in the clinic, deviating from traditional playbooks. High inflation and interest rates made fundraising difficult, pushing capital toward late-stage, de-risked assets.

This created a "tale of two cities" in biotech. On one side, late-stage assets command high premiums, with post-deal valuations reaching historic highs—83% in 2023 and 75% in early 2024, compared to the typical 50-60%. On the other side, one-third of biotechs in 2022 and 2023 lacked the cash to operate for a year, leading to closures, reverse mergers, and therapeutic reprioritization.

IPOs and M&A activity have slowed, and venture capital funding remains below historical averages. Private investments in public equity (PIPEs) rose in recent quarters. This reflects investors' preference for liquidity. What indicators should the industry watch in early 2025 to gauge recovery and momentum?

The start of the year will be crucial in determining how regulatory changes, appointments, and resulting policies take shape. The uncertainty on the capital markets over the last two years created a narrative of "cautious optimism" which ultimately led to “optimism fatigue”. Heading to 2025, the outlook is much better, particularly with FirePower of US$1.3 trillion of available capital available for dealmaking.