No one can predict the exact timing of a biotech recovery, but several measurable signals suggest the sector is closer to a turning point than it has been in years. Biotech stocks, particularly smaller companies tracked by the SPDR S&P Biotech ETF (XBI), have underperformed the broader market since peaking in early 2021. Yet underneath that weak price action, the fundamentals that typically precede a biotech rebound are quietly falling into place: rising deal activity, strong FDA approval rates, growing venture investment, and a pipeline of clinical trial results that could move the entire sector in 2025.
Where Biotech Stocks Stand Right Now
The two most widely followed biotech benchmarks tell slightly different stories. The XBI, which weights smaller biotech companies equally, is down about 0.67% year to date. The iShares Biotechnology ETF (IBB), which is dominated by large-cap names like Amgen and Gilead, is off roughly 2.89%. Over three years, though, XBI has returned about 16.76% compared to IBB’s 9.89%, suggesting that smaller biotechs have already started recovering from their 2022 lows even if it doesn’t feel like it on a daily basis.
The broader context matters here. Biotech is a sector that depends heavily on cheap capital and investor appetite for risk. When interest rates rose sharply in 2022 and 2023, the cost of funding long development timelines jumped, and investors rotated into safer assets. Many small biotechs that went public during the 2020-2021 boom saw their stock prices fall 70% or more. That damage hasn’t fully healed, but the conditions that caused it are starting to shift.
Why M&A Activity Is the Strongest Recovery Signal
Large pharmaceutical companies buying smaller biotechs is one of the most direct ways value gets unlocked in this sector. When Pfizer, Merck, or AbbVie acquires a biotech at a premium, it validates the science, returns cash to shareholders, and attracts new investment into similar companies. In 2023, total biopharma deal value hit approximately $152 billion for acquisitions over $1 billion, a 79% jump from 2022. Analysts at IQVIA projected that figure would climb to $180 to $200 billion in 2024.
The reality turned out more complicated. According to Stifel data, overall deal value in 2024 came in at about $82 billion, well below the optimistic forecast. But there were still 15 acquisitions over $1 billion, making it the sixth-highest year for large deals since 1995. The drop in total value largely reflected the absence of a few mega-deals rather than a collapse in interest from big pharma.
Looking into 2025, industry analysts expect M&A to pick up meaningfully. Large pharmaceutical companies face a wave of patent expirations over the next several years and need to replenish their pipelines. A potentially friendlier antitrust environment under the current administration, combined with the possibility of further interest rate cuts, could remove two of the biggest obstacles that slowed dealmaking in 2024. For investors in small and mid-cap biotechs, increased acquisition activity acts as a rising floor under stock prices because buyers typically pay 50% to 100% premiums over pre-deal prices.
FDA Approvals Remain Strong
The FDA approved 55 new drugs in 2023, the second-highest total on record behind 59 approvals in 2018. That number was consistent with the five-year average of about 53 approvals per year and represented a sharp rebound from just 37 approvals in 2022. Of those 55, 17 were biologics, the complex protein-based therapies that represent much of biotech’s core science.
A high approval rate matters for the sector in two ways. First, it directly rewards companies whose drugs cross the finish line, often sending their stock prices sharply higher. Second, it signals that the regulatory environment is functioning predictably, which makes investors more comfortable funding earlier-stage companies. A regulatory drought or a string of surprise rejections can chill the entire sector. Right now, that’s not the problem.
Clinical Trial Catalysts Coming in 2025
Biotech stocks frequently move on binary events: a drug either works in a clinical trial or it doesn’t. Several high-profile late-stage trial results expected in the second half of 2025 could serve as catalysts for the broader sector, not just the individual companies involved.
- Heart disease risk reduction: Novartis is testing whether lowering a protein particle called Lp(a) can reduce cardiovascular events. A positive result would open an entirely new treatment category for heart disease, potentially worth tens of billions in annual revenue across the industry.
- Obesity pills: An oral weight-loss drug called orforglipron is being studied in a longer trial that could report later this year. If an effective pill version of the injectable GLP-1 drugs proves out, it would reshape the obesity market and draw enormous investor attention to biotech broadly.
- Cancer immunotherapy: Several next-generation cancer drugs are in late-stage testing, including Akeso’s lung cancer treatment with final data expected around year-end and Sanofi’s skin disease therapy that completed enrollment ahead of schedule.
Any one of these results could spark a sector-wide rally if the data is strong. Biotech investors tend to treat major positive readouts as proof that innovation is working, which pulls capital into the sector more broadly.
Private Funding Shows Growing Confidence
Venture capital investment in biopharma reached $26 billion in 2024, up from $23.3 billion in 2023. That increase came despite fewer total funding rounds (416 versus 462), meaning the average deal size grew. Larger rounds signal that investors are willing to write bigger checks for the companies they believe in, which is a sign of increasing conviction rather than spray-and-pray speculation.
This matters for public market investors because private funding is the pipeline that feeds future IPOs and acquisitions. When venture money flows in, it creates more companies with validated science and clinical-stage programs. Those companies eventually need to go public or get acquired, both of which create opportunities for public market investors. The fact that private investment is rising while public biotech prices remain relatively flat suggests there’s a disconnect that will eventually close.
What Could Delay a Recovery
Several risks could push the timeline further out. If the Federal Reserve holds interest rates higher for longer than expected, small biotechs that burn cash while developing drugs will continue to face expensive financing conditions. Political uncertainty around drug pricing regulation could weigh on sentiment, particularly for companies developing treatments in categories where Medicare negotiation is expanding. And broader market selloffs driven by recession fears or geopolitical events can drag biotech down regardless of the sector’s own fundamentals.
There’s also the simple math of clinical trial failure. Roughly 90% of drugs that enter clinical testing never reach the market. A string of high-profile failures in the trials mentioned above could set the sector back by dampening the enthusiasm that positive data would otherwise generate.
What Recovery Typically Looks Like
Biotech has gone through several boom-and-bust cycles over the past three decades. The pattern tends to follow a recognizable sequence: a speculative peak, a sharp drawdown that lasts one to three years, a bottoming period where valuations compress to the point that acquisition activity accelerates, and then a recovery driven by a combination of deals, approvals, and renewed investor risk appetite.
By most measures, the sector entered the bottoming phase in late 2023 and has been grinding sideways since. The building blocks for recovery, including rising M&A, strong approval rates, increasing private funding, and a loaded clinical catalyst calendar, are largely in place. What’s missing is the spark: either a shift in monetary policy that makes growth stocks attractive again, a blockbuster clinical trial result that captures headlines, or a wave of acquisitions large enough to force investors to re-evaluate the sector.
For patient investors, the current environment resembles previous pre-recovery periods more closely than it resembles the beginning of a further decline. That doesn’t mean prices can’t go lower in the short term, but the fundamental ingredients that have historically preceded biotech rallies are accumulating. The most likely scenario is a gradual recovery that accelerates if interest rates come down and clinical data cooperates, with 2025 and 2026 as the window where the pieces come together.