Stable growth continues in the life sciences VC market

Life sciences companies in the pharmaceutical and biotechnology sectors dismayed by the dip in venture capital (VC) activity in 2023 saw some signs that trends are starting to turn favorable. Through the first three quarters of 2024, the market saw venture capital deal volume stabilize.  Although deal volume is still below pre-pandemic averages, the life sciences industry is experiencing larger deal sizes over the last several quarters, indicating that life sciences companies that can demonstrate unique value propositions or show promising early signs of success can earn investor confidence.

By examining some of the recent life sciences industry deal and stock price trends in more depth, a picture emerges of a market where VC money is present and can be raised in increasingly substantial amounts, but only with the right combination of sound organization and promising research opportunities. 

When looking at the overall deal volume for 2024, volume rose from the third quarter of 2023 but did not match the previous year’s high and still represents a sharp decline both from the pandemic peak of 2021 and the pre-pandemic average in 2019. “It seems like less companies are graduating from the Seed to Series A stage” said Grant Thornton Valuation & Modeling Manager Ben Blieden, “which should mean that if you’re intent on progressing along the fundraising stages, you’re going to want to be really strategic and pro-active about approaching each next round of financing.”

Grant Thornton National Industry Managing Principal for Life Sciences Zara Muradali said her sense of the market from client conversations is that it comes down to recent production. Those who haven’t developed assets up to expectations are having the most difficult time attracting new money.

Though deal volume has not returned to pre-pandemic levels, the average amounts raised in both Seed and Series A deals continue to confirm a trend toward increasing size, particularly at the Series A level. Blieden said there were some instances of particularly large recent Series A financings last year. In one notable example, Xaira Therapeutics raised a $1 billion Series A financing, which contributed to the rise in the overall average. “What we’ve seen in many cases is that a company has a well-established lead investor happy to contribute a normal, healthy amount, but because the company was able to secure that lead investor, the company is then able to raise a significant amount of capital from a variety of follow investors” Blieden said. Life science companies investing in AI also see rising investors’ interest.  For example, the size of the round for Xaira was due in large part to the company’s emphasis on using AI in the drug discovery process.

Grant Thornton Valuation and Modeling Principal Oksana Westerbeke said proper analysis of this kind of data is essential for life sciences companies to take advantage of these indicators, as timing can be a crucial factor in a successful fundraising round. “For many Series A deals, we see the overall number of investors double or triple since the pre-pandemic averages.”

The flattening of the Series A deal size in the last half of Q4 could be of some concern to companies seeking venture capital and Blieden said if it continues into 2025.  It would represent a sizable shift from the five-year growth trend.

The pre-money valuations for seed-stage companies show a steady growth to the second quarter of 2022, followed by downturn period marked by a spike in 2023 and another spike at the end of last year. Despite these recent downturns and spikes, Blieden noted that the overall trend clearly represents a rise in pre-money valuations that has outpaced inflation. The positive trend is present in the Series A stage as well, but appears to be less steep of an increase in pre-money valuations over this time period.

The significance of this trend is that a year ago, there were suggestions that a down market had taken hold in the life sciences sector. However, the trend and durability in pre-money valuations, would suggest otherwise and that investors are continuing to view this industry with interest. 

When looking at the past three years of stock price performance in the life sciences sector, there seems to be three basic facts: (1) the mega-cap companies in life sciences (of which there are in this cohort analysis) are doing well in comparison to other size categories, (2) The life science sector as a whole has seen stock prices decline by an average of around 43% following the pandemic and (3) The smaller the company, on average, the worse it has performed.

This would not seem to be an indication of a healthy market for early-stage companies at first glance. Blieden said that because they are so much less diversified because of their size, smaller companies are more significantly affected by a bad clinical trial performance or fickle investor interest. Also, by their nature, the small-cap and micro-cap sizes are going to include many companies that failed or had significant losses due to setbacks, which could skew the average downward, without enough high-performing companies to offset the failures and setbacks.

Slow growth in the life sciences sector is clear when comparing its performance to both the Nasdaq and the S&P 500 indices, which have shown a tremendous amount of growth in the past two years. But while biotech and pharmaceutical stock returns haven’t kept up with the broad market indices, they aren’t unusual in that regard.  The boom in technology stocks has been a primary driver of broad market growth with tech companies now comprising the majority of the top 10 most valuable companies in the world.

So, then, what to make of the current state of the life sciences market? Is it still in a downturn, or has stability set in, particularly for companies with extensive investments in technology. Recent trends suggest the latter is true.

Expanding on how to appeal to investors in the current climate, Muradali noted that “the pharmaceutical sector in 2025 is expected to be characterized by rapid innovation and strategic realignment. Companies will need to prioritize technological solutions, particularly in AI and data analytics, while also addressing core challenges like R&D performance and M&A activity.”