Chris Hollowood – CEO, SIML
The biotech sector is emerging from a significant period of restructuring and consolidation, resulting in a market with stronger fundamentals and higher-quality companies. However, renewed economic and political uncertainty have added to the issues weighing on the sector and delaying the recovery.
Better fundamentals but uncertainty rumbles on
The challenges experienced by biotech in 2024 have persisted so far in 2025, with economic and political uncertainty now adding to structural issues that have weighed on the sector, such as the cost of capital. Nevertheless, once those policies embed and predictability returns to the market, then we believe there are greater reasons for optimism.
We are progressing through the tail of the longest biotech bear market I’ve experienced in my career. Thankfully, innovation has not wavered in the face of market adversity. We have more ways to treat disease than ever before and new breakthroughs continue to deliver transformational benefits for patients and society.
Ultimately, the fundamentals for investing in healthcare remain strong and wherever there is innovation, there is opportunity for investors.
Whilst the rewards on offer haven’t been quite so clear over the last few years, a combination of factors are now converging to give us more confidence that brighter days are ready to return, once a more stable policy environment comes into view.
A much-needed reset
It’s important to note that, whilst biotech has been profoundly challenged in recent years, the sector has come a long way. You can track this by following the XBI, which provides a good barometer of performance across the sector.
In the summer of 2008, the XBI peaked at $23, before the financial crisis sent it crashing back down. It didn’t get above this again for three years, until mid-2011. Wind the clock forward 10 years to February 2021 and the XBI peaked at over $170, as biotech emerged as the white knight of the global pandemic and cheap
capital propelled a boom of interest and activity.
XBI index
However, the boom was followed by a bust. By January 2022 the XBI dropped below $100, where it remains today. As the bear market bedded in, the cost of capital soared, companies struggled to execute financings and competition for cash intensified.
Biotech is a cash intensive business and capital access is the primary driver of the sector’s health. The sheer volume of capital available during the bull market meant that biotechs entered this period with the strongest balance sheets they’d ever had. Companies were able to defer difficult decisions in the hope that the sun would come out – but it didn’t.
As the gloom persisted, the sector was forced into a wave of restructuring, consolidation and rationalisation. This is now largely complete. Although it has been tough, the correction has been necessary for a recovery. Valuations have come down from unrealistic highs and only the best businesses have survived. This leaves the sector in better shape and primed for growth.
An improved platform
At SIML, we quickly recognised the scale of the challenge and have been very proactive in our portfolio management. We implemented a clear strategy to ensure that the best clinical programmes in our portfolio were financed, that our category leaders had secure paths forward, and that we maximised value elsewhere through sales or consolidation. Additionally, we set out to take advantage of market conditions, selectively adding clinical-stage opportunities, such as with Beacon and iOnctura.
The result? We’ve built a better-quality portfolio, that is more diverse across modality and now is 78.5% in clinical stage and commercial companies with two new companies expected to be in the clinic before year end. The portfolio is now well-financed and in a strong position to deliver a lot of clinical data – which is the oxygen of growth in our sector.
This proactivity and not shying away from difficult decisions have kept us ahead of the curve and have positioned the portfolio for strong risk-adjusted returns as markets improve.
At the turn of the year, we were cautiously optimistic for biotech markets in the latter half of 2025. However, after a year of elections, renewed political and economic volatility is dampening our outlook, which is also compounded by recent upheaval at the US FDA. We hope to see more predictable macroeconomic conditions before the year is out. But, for now, it seems to be delaying biotech’s path to recovery, despite improving fundamentals elsewhere in the sector and cost of capital on a downward trajectory.
Market dynamics
The challenges outlined above dramatically impacted valuations in the public markets, which was well documented. Thankfully, however, there was some recovery here. Strong clinical data is once again driving value and later-stage assets have been leading the charge in terms of financings and M&A.
Dynamics in the private markets are sometimes harder to spot.
In the initial throes of the bear market, venture capitalists (VCs) stopped doing new deals and reserved capital for their existing portfolio. When this happens, there is very little pricing adjustment and investments get marked flat.
In the second phase of the bear market, when VCs are confident their portfolio is secure, they can initiate new deals. This can lead to pricing adjustments, which can be difficult. While the range of valuations remains wide, this dynamic is being worked through, rebasing the sector so it can access the capital required to position it for future growth.
A looming patent cliff
A further dynamic in valuation is biotech’s big brother – the pharma sector. Pharma is fast approaching a patent cliff of over $350 billion in worldwide sales by 2030. Faced with this loss of exclusivity problem, companies are either recognising the need to plan for declining revenues or turning to M&A.
Historic and projected revenue erosion through loss of exclusivity
Pharma is looking to biotech to restock its pipeline. The trend has been for pharma to focus on late-stage assets that will really move the needle. These later-stage assets are further de-risked and more likely to bring nearer-term rewards. We have seen an uptick in M&A in the first quarter of 2025, including an increase in acquisitions of commercial-stage public companies.
We are heading towards a standoff where pharma still needs to acquire innovation, but the pool of ‘ideal’ profile acquisitions is significantly smaller. This means that pharma may need to go for earlier-stage assets to access big market opportunities or look at smaller market opportunities to stay at later stages.
It’s going to be interesting to see how it shakes out, but my guess is that they’ll do both. Either way, potential M&A activity is another reason for optimism, as it will drive valuations and recycle capital into the sector.
Returning to growth
In summary, it’s a tale of convergent forces paving a slow path out of the bear market, but with these positive drivers being suppressed by political and economic uncertainty.
Firstly, biotech has now largely restructured, leaving us with better companies and better fundamentals. Secondly, pharma needs to spend money to address a looming patent cliff, and this will catalyse
a recovery.
The final piece of the puzzle is the macroeconomic environment. Headwinds that the sector has experienced in the last few years are abating as interest rates decline, but policy uncertainty has stepped
in to delay the recovery.
When this uncertainty finally clears the convergence will be able to complete. When that happens, Syncona will be ready to make the most of it.
