From Underperformance to Opportunity: Biotech's Case for 2025

by Christopher Gannatti of WisdomTree, Inc., 1/31/25

Key Takeaways

  • Despite continued underperformance in 2024, the biotech sector enters 2025 with a brighter outlook driven by groundbreaking innovations like mRNA cancer vaccines and CRISPR-based therapies.
  • Structural shifts, including operational discipline and AI-powered drug discovery, signal resilience and a long-term growth narrative for biotech, even amidst macroeconomic and regulatory challenges.
  • Historically low valuations, coupled with sector rotation dynamics and favorable policy initiatives, position biotech as a compelling opportunity for investors seeking growth in 2025.

In December 2023, I argued that biotech was poised for a turnaround after a prolonged stretch of underwhelming returns.1 Unfortunately, as we end 2024 and begin 2025, the sector has continued to underperform expectations, leaving investors disappointed. But this disappointment should not obscure the shifting dynamics that may favor a brighter outlook in the year ahead.

The Lingering Challenges

The biotech sector has faced a combination of structural and cyclical hurdles, presenting investors with no shortage of complexity. Funding for startups and mid-sized biotech companies, for instance, has been particularly tight. Yet, amidst this drought, there are pockets of improvement that signal resilience. Global venture funding reached $314 billion in 2024—a modest 3% rise from the previous year—with health care startups leveraging AI to attract outsized interest.2 The IPO market also showed flickers of life, with companies like Bicara Therapeutics, MBX and Zenas BioPharma collectively raising more than $700 million.3 Even Maze Therapeutics and Stada have begun preparing for public offerings, reflecting a gradual but meaningful restoration of confidence.4

Meanwhile, mergers and acquisitions have periodically occurred. Gilead Sciences, for example, made headlines with its $4.43 billion purchase of CymaBay Therapeutics,5 while Amgen’s $27.8 billion acquisition of Horizon Therapeutics6 underscored the appetite of established players to expand their pipelines. This momentum suggests that, even in tough environments, capital finds its way to innovation. It’s possible this can continue.

Regulatory uncertainty has also weighed heavily on biotech. The FDA’s reforms to its Accelerated Approval Program—demanding more stringent confirmatory trials—have lengthened timelines and heightened costs. Yet, even as these reforms create challenges, the FDA has supported therapies like Zenocutuzumab for rare cancers and Encorafenib for metastatic colorectal cancer.7 There is an evident balancing act here: regulatory hurdles on the one hand and support for high-potential breakthroughs on the other.

Adding to the complexity, the macroeconomic environment has been no less punishing. Rising interest rates and inflation have steered investors toward safer, income-generating assets. The rapid rate hikes of 2022 reshaped the landscape, squeezing valuations across growth sectors. In 2024, the expected reprieve—a series of rate cuts—failed to materialize, leaving biotech in a difficult position. For 2025, much hinges on how central banks manage monetary policy.