How asset managers can make sense of life sciences trends

Obesity drugs, political changes affect value in US, Ireland

As asset managers consider their investments and involvement with companies in the life sciences industry, numerous developments related to innovation, regulation and competition are affecting their valuation assessments.

Key life sciences valuation issues that asset managers are watching include:

• Performance of recent IPOs to assess access to capital, recovery in capital markets, and viability of exit opportunities.
• Tax and trade developments, particularly those related to the new administration in the United States.
• Looming patent cliffs impacting significant proportions of Big Pharma revenue and whether this will spark increased M&A activity to close pipeline gaps.
• The continued crossover of higher-multiple tech companies into the healthcare space.

During a recent Grant Thornton webcast, international professionals broke down the major trends that will reshape values in the industry, both in the U.S. and in Ireland, an international hub for life sciences. The webcast showcased the combined knowledge of professionals from Grant Thornton Advisors LLC in the U.S. and Grant Thornton Ireland.

The panelists highlighted promising investment opportunities in life sciences but also cautioned about the risks facing this industry.

Asset managers can prepare for critical investment decisions by gaining an understanding of the key valuation trends in the U.S. and Ireland markets — as well as the effect of macroeconomic factors and trade relations on valuation in life sciences and the broader market.

Obesity drugs drive growth

The advent of new drugs to treat obesity, especially incretins like GIP/GLP-1 agonists, has reshaped the competitive landscape in life sciences in recent years, driving Eli Lilly and Novo Nordisk to the top of the Big Pharma league tables.

“In fact, Lilly’s market cap is almost double that of its nearest non-obesity competitor, which is [Johnson & Johnson]. And this is even after the market correction we saw at the end of 2024,” said Grant Thornton CFO Advisory Services Principal Krystn Hammond, considering data as of mid-January.

The blockbuster success of these new drugs contrasts with the challenges of the larger pharmaceutical market. Companies betting almost entirely on obesity drugs have consistently outperformed the rest of the market.

“You can see that Big Pharma has had pretty flat returns over the one-year, five-year and 10-year [compound annual growth rate] periods that we looked at, compared to CAGRs in the 20%-plus range for our obesity composite,” Hammond said.

A look at recent deals announced during JPM week shows continued mixed sentiments in the public markets. It is rumored that two of the takeover targets had been running dual-track M&A and IPO processes — only to decide that a company sale was favorable, Hammond said.

“The fact that they went and took the buyout deal might be indicative that the sentiment around public equity markets is still a little bit lukewarm and bearish,” she added.

That reflects a trend of slow-paced and low-priced IPOs for pharma and biotech in recent years. After a surge in 2021, IPO activity cratered in 2022 before showing initial signs of recovery at the end of 2023 into 2024.

Conservative strategies dominate

Looking at M&A activity during JPM week, year-over-year trends also appear to have shifted, with three deals this year focused on products that have already reached commercialization or have submitted an NDA/BLA to the FDA.

“It seems like there is a shift between 2024 and 2025 to move toward a de-risking strategy,” Hammond said about deals announced during the JPM conference.

The past few months also have been particularly turbulent for life sciences in the public markets. While the S&P 500 and Dow Jones Industrial Average grew by a few percentage points during the presidential transition, there was a significant drop in the XBI, tracking pharma companies.

The 12% XBI drop during the lame-duck period corresponded with uncertainty about Trump administration picks for Cabinet seats, the assassination of UnitedHealthcare CEO Brian Thompson, disappointing results for a number of late-stage clinical trials and the Federal Reserve’s strategy of “low and slow” interest rate cuts, Hammond said. The XBI has since rallied through early February back to mid-December levels, prior to the year-end sell-off we observed.

Technology companies muscle in

Life sciences’ performance in the public markets has been underwhelming for many. “You’ll often hear people comparing biotech to tech and trying to understand why biotech has had an underwhelming reaction to rate cuts, but tech has continued to outperform,” Hammond explained.

Part of the reason, she said, is that Big Tech has far more financial firepower, with the chip manufacturer Nvidia having a market cap about equal to that of all the Big Pharma players combined, Hammond said. Additionally, there’s validity to the perspective that the general investor perhaps feels they better understand tech and market response to developments in that sector versus biotech.

The continued crossover by technology into life sciences, such as through wearable devices, Amazon’s move into pharmacy, and NVIDIA’s recent partnerships with large healthcare players, potentially further bolster this viewpoint.

Signs of renewed movement

Venture capital funding for biotech was about $26 billion in 2024, exceeding the total for the prior year, Hammond said, citing JPMorgan data.

“So, we’ll have to see if that translates into a better IPO environment in 2025,” she said.

A handful of companies have filed for IPOs in January across therapeutic areas ranging from obesity and metabolic to kidney disease, cystic fibrosis and inflammation.

“Taxmageddon” raises questions

This year will bring one of the largest tax debates in years to the U.S., with significant consequences for life sciences and other sectors.

“We’re looking at what tax policy wonks are calling ‘taxmageddon’,” said Grant Thornton Washington National Tax Office Tax Legislative Affairs Manager Colin Wilhelm.

The tax code is set to change dramatically after this year with the expiration of time-limited tax provisions. “We’re looking at an extraordinary number of expiring provisions that were passed into law as part of the 2017 Tax Cuts and Jobs Act,” Wilhelm explained.

Without Congressional action, the U.S. could see changes including:

• Increases to rates across tax brackets
• The sunset of the Section 199A qualified business income deduction
• The expiration of a cap on the State and Local Tax (SALT) deduction
• Higher tax obligations for multinationals under changes to anti-base erosion provisions

President Donald Trump has promised to pass a new tax bill within a matter of months, but the process will be complicated by political factors. Republicans hold a very narrow majority in the U.S. House, and they’ll be using a political process, reconciliation that forces lawmakers to ensure provisions are temporary and/or revenue-neutral.

“This gives every rank-and-file [House] member a ton of leverage for their own priorities,” Wilhelm said.

Republicans also have floated other changes, notably including a lowering of the corporate tax rate to 15% for some companies.

“This has not really been defined at all,” Wilhelm said. “So that’s going to be another sort of moving variable, along with about 1,000 other things during this whole process.”

Among those other things are tariffs, with President Trump proposing or levying tariffs on numerous major trading partners and including pharmaceutical imports among the tariffs he's planning, although he said he wanted to provide time for drug makers to move production to the United States so they don't have to pay tariffs. Tariffs could come into play in tax debates, but they also carry the threat of economic consequences.

U.S. policies affect Ireland

Life sciences has grown into a dominant industry for Ireland in the last half-century, especially since Pfizer set up shop in 1969.

Today, 19 of the 20 top global pharmaceutical companies have a presence in the republic, as do 18 of the 20 top medical device manufacturers.

Uncertain waters in Ireland

The country has lately seen “significant investment announcements,” including more than $1 billion of planned expansion by Lilly, Scanlan said.

And after a “massive” 2023 for M&As, Ireland saw much less activity last year.

“There were challenges in terms of rising costs, global competition, regulatory hurdles, and we saw quite a dip toward the end of 2024,” Scanlan said.

Despite the challenges seen in 2024, which are expected to persist into 2025, the announcement of MSD’s acquisition of Wuxi’s vaccine facility in Ireland begins the year positively, with an investment worth $500 million expected in 2025.

“That’s a really promising start,” Scanlan said.

Meanwhile, it’s difficult to say how the new Trump administration will play out for life sciences in Ireland. Many feared that changes during Trump’s initial administration, beginning in 2017, would derail investment in Ireland. But the opposite has happened in the eight years since, with a “mushrooming” of foreign direct investment. That has benefited Ireland’s economy, while also making Ireland heavily dependent on foreign investments, which does come with risks.

In the grand scheme, the new U.S. administration could drive changes that result in multinationals paying more taxes on operations in Ireland, with most of that money going to the U.S. Treasury.

The U.S. also could incentivize companies to move intellectual property from Ireland to the U.S., with significant tax implications. But moving intellectual property is expensive, and with a lot of taxes potentially at stake this could affect valuations.