A few factors have been especially significant in contributing to uncertainty this year. First, the prospect of tariffs has loomed large in the pharmaceutical industry, as there is a heavy reliance on ex-U.S. production. Due primarily to differing tax policies, roughly 40% of finished drugs and 80% of active ingredients in drugs that are administered in the U.S. are sourced from abroad. Second, there has been a fairly steady drumbeat of pressure on drug companies to price their products similarly between the U.S. and other countries. This is important, as prices here have typically been far higher than in many other parts of the world (estimated on average to be almost 3x higher). The disparity in pricing is troubling, but a quick solution is difficult to achieve without disruption to the industry. Third, the regulatory infrastructure in the U.S. (notably the Food and Drug Administration) has undergone considerable change, leading to concerns over regulatory timelines and potential changes in approval criteria.

These factors produced various ripple effects. Drug companies faced increasing uncertainty about their future profitability, as revenues could be lower, and expenses could be higher. For a time, primarily in the first half of the year, their valuations suffered, prompting greater caution and fewer acquisitions. Consequently, the industry continued a trend that began several years ago in which acquisitions of smaller biopharma companies were relatively infrequent, and initial public offerings were extremely rare. Many startup companies, needing to stay independent longer than anticipated, were forced to raise more equity than originally planned. This, in turn, often created downward pressure on valuations, even when the companies were performing well, as companies raised later equity rounds.

While questions remain regarding tariffs, drug pricing policy, and the ongoing transition at the FDA, the industry appears to be shrugging off these concerns to a fair extent. There are indications that envisioned policy changes may be less significant than initially communicated. Also, the industry is adapting, announcing intentions to bring some production back to the U.S. and negotiating pricing arrangements with the federal government that are more favorable to the industry than had been feared. The situation at the FDA varies by therapeutic area, but the agency is taking steps to accelerate approvals for certain drugs and devices, signaling a willingness to grant approvals with less data than has historically been required. Consequently, valuations have ticked up, most notably in the publicly traded biotech indices, which are now up roughly 30% year-to-date. Valuations of private companies have not yet caught up, but we are seeing successful new financing rounds as well as solid, if not spectacular, M&A activity.