By Andrew Merken, Shareholder, Polsinelli (Special Guest Contributor)
Keep the faith.
When it comes to life sciences industry transactions, the business cycle is alive and well. After a spectacular second half of 2020 and all of 2021 – which took most everyone by surprise given COVID – the past three years have seen a marked decrease in the volume – though not the dollar value – of activity. The number of venture capital financings, Merger & Acquisition (M&A) transactions, licensing deals and Initial Public Offerings (IPOs) dropped – in some cases fairly significantly – in 2022 through 2024.
Underlying the 2022-2024 slowdown was inflation, a rise in interest rates and a slackening economy. From a borrowing perspective, higher interest rates raised the cost of capital, requiring companies to lean less on debt and more on equity in financing their operations and transactions. At the same time, however, those same higher interest rates caused investors to cycle away from the stock market and to park more capital in bonds. As the IPO markets cooled, so did public market liquidity opportunities for venture capital investors, resulting in less new capital available for new investments. And as the economy slowed, venture capital investors were forced to reserve more capital to keep existing portfolio companies afloat, exacerbating the lack of funding available for new investments. By one estimate, US venture capital funding declined from $47 billion in 2021 to $34 billion in 2022 (a 22% decrease), to $25 billion in 2023 (an additional 27% drop), before increasing slightly to $27 billion in 2024. Drug discovery and therapeutics companies tended to be the most active recipients of VC funding.
Interestingly, though, while the overall amount of capital invested decreased as did the number of deals, the average deal size increased. Investors pivoted toward later stage deals – Series B, C and D rounds – which tend to be less risky but which require more capital and, arguably, a number of well-known life sciences VCs transitioned to being growth equity investors in their most recent funds. Early-stage (Series Seed and Series A rounds) investing decreased. At all stages, premoney valuations fell, with down rounds becoming more frequent and, often, dramatic.
M&A activity showed similar trends; in the US life sciences industry, M&A deals dropped in value from $180 billion in 2021 to $70 billion in 2022 (a 61% decrease) before increasing to $113 billion in 2023 and then decreasing again to $111 billion in 2024. The number of transactions also decreased, by 31% from 2021 to 2022 before increasing by a modest 5% in 2023 and then decreasing again by 23% in 2024. As with VC investing, though, the median average deal size increased during this same timeframe – from $110 million in 2021 to $160 million in 2022, before decreasing to $100 million in 2023 and increasing again to $199 million in 2024 – as did the trend of transactions favoring later stage, less risky assets (late stage development/early commercialization) over early stage ones, in part because strategic acquirers looked to acquisitions to supplement declining revenue growth. The big winners in M&A were companies focusing on oncology, immunology and neurology. Licensing deals also decreased, from 215 in 2021 to 182 in 2022 (a 15% decrease) and then again to 134 in 2023 (an additional 26% decrease).
Following a strong 2021 in which there were 99 life sciences IPOs that raised a total of $15.6 billion, 2022 saw only 17 life sciences IPOs ($2.4 billion) and only 13 IPOs in 2023 ($2.7 billion). The flight to debt and the slowing economy were to blame, with the trickle-down effect of less IPO liquidity impacting the venture capital markets and lower stock prices of already public companies making stock acquisitions more difficult. In addition, much like in venture capital and M&A, IPOs have been trending toward less risky later stage, clinical asset companies.
Then, as the calendar turned to 2025, there was a renewed sense of optimism. Those who were in San Francisco in January 2025 for the JPMorgan Healthcare Conference noticed that attendance was back to pre-COVID levels, partnering meetings for companies raising capital with potential investors were for the first time in a number of years being scheduled with ease, and overall there was a palpable sense of excitement about the coming year.
Toward the end of January, however, policy changes in Washington served to change the environment. The uncertainty around the regulatory framework – FDA staffing and priorities, the FTC’s approach to mergers, NIH funding, HHS’ approach to vaccines and the SEC’s oversight of the capital markets, along with the discussion around and imposition of tariffs – put a fairly quick stop to the optimism. Interest rates and inflation that had decreased in the second half of 2024 – resulting in lower costs of borrowing and a renewed trend toward equity – and which were expected to jump start the economy became less favorable. Term sheets that were expected to be signed were shelved, deals for which the transaction documents were being negotiated were put on hold, and overall a renewed sense of anxiety washed over the ecosystem.
According to JPMorgan, VC financings and IPOs continued their downward trend in the first half of 2025:
- VC deals in therapeutics and drug discovery totaled $11.2 billion, as compared to $14.2 billion in the first half of 2024.
- There were only 5 biopharma IPOs over $15 million in the first half of 2025, versus 10 in the same period of 2024.
However, M&A and licensing deals turned the corner in the first half of 2025, according to JPMorgan:
- M&A deals totaled $42.5 billion, which is a significant increased from the $15.9 billion in the first half of 2024.
- Licensing deals totaled app. $120 billion announced deal value in the first half of 2025, versus $76.3 billion for the first half of 2024.
JPMorgan and others attribute these increases to several factors, primary among them Big Pharma’s need to replace revenue lost to the impending patent cliff – with the patents on a significant number of blockbuster drugs expiring between 2025 and 2033 – and the continued shift to acquiring less-risky later stage assets versus funding more risky earlier stage assets.
In addition to the uptick in M&A and Licensing deals for later stage companies, there is also good news for early-stage companies. Over the summer, we have started to see a slight thaw – not the supercharged environment that we saw in early January, but a slight uptick in activity. Companies who have not given up and who have been persistent in sourcing investments are starting to find new opportunities. Some NIH funding has also been restored – at least temporarily. The uncertainty seems to be lessening, and the industry is learning to work around the new realities. The ordinary course business cycle upturn that started in early 2025 seems to have derailed, but the ultimate uptick will not be precluded – simply delayed. It’s very possible that January 2026 will bring what January 2025 signaled. While that optimism doesn’t pay the bills or get the deal done, it will hopefully be of some comfort to those who had hoped 2025 would be their breakthrough year.
Andrew Merken is a Shareholder in Polsinelli’s Venture Capital and Emerging Growth practice where he focuses on corporate and transactional matters for life sciences clients covering the entire business life cycle, from start-up (formation and organizational matters) to seed and venture stage funding to growth stage (later stage funding, corporate collaborations and buy-side M&A) and ultimately exit (sell-side M&A or IPO).
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