Biotech stocks have underperformed the broader market for several years running, weighed down by a combination of high interest rates, dried-up capital, high-profile drug failures, and new government pricing rules that squeeze future revenue. While the sector has shown small signs of stabilization, the forces keeping it down are structural, not just a bad quarter or two.
Interest Rates Hit Biotech Harder Than Most Sectors
The single biggest drag on biotech valuations since 2022 has been the rise in interest rates. Most biotech companies don’t yet have products on the market. Their value comes almost entirely from drugs they hope to sell years from now. To figure out what those future profits are worth today, investors use a calculation called discounted cash flow, which shrinks the value of distant earnings based on current interest rates. When rates were near zero during the pandemic, those far-off paydays looked enormous. With rates climbing sharply, the same projected revenue is worth significantly less on paper.
This math punishes biotech more than almost any other industry. A software company or retailer generates cash now, so rate increases don’t dramatically alter its valuation. A pre-revenue biotech company whose first product might launch in 2029 sees its estimated value drop steeply with every rate hike. That’s why the sector cratered starting in 2022 and has struggled to recover even as the broader stock market hit record highs.
The IPO and Funding Freeze
The flow of money into biotech has slowed dramatically compared to the pandemic boom. In 2024, just 32 biopharma companies went public. That’s a slight uptick from 27 in 2023, but it looks tiny next to the 134 IPOs in 2021 or even the 106 in 2020. Worse, the companies that did go public performed poorly: the class of 2024 saw an average stock decline of 29% after their debuts.
Venture capital investment did tick upward, with $26 billion raised in 2024 compared to $23.3 billion the year before. But the number of funding rounds actually dropped from 462 to 416, meaning fewer companies received checks even as total dollars grew. The money is concentrating in a smaller number of perceived winners while hundreds of smaller biotechs struggle to fund their research. BioSpace characterized the period as a hangover from “the pandemic sugar rush,” and many companies that raised money easily in 2020 and 2021 have burned through their cash without reaching profitability.
High-Profile Drug Failures Rattled Confidence
Clinical trial failures are a normal part of biotech, but 2024 delivered an unusually painful string of late-stage flops from major players. These aren’t obscure startups. Some of the biggest names in pharma saw their most promising candidates collapse:
- Novo Nordisk recorded an $816 million loss after its blood pressure drug ocedurenone failed a phase 3 trial.
- Merck pulled the plug entirely on vibostolimab, a cancer immunotherapy once seen as the next frontier in oncology, after multiple phase 3 trials missed their goals.
- Pfizer revealed that its gene therapy for muscular dystrophy failed to improve motor function compared to placebo.
- Cassava Sciences saw its Alzheimer’s drug simufilam miss both of its main study goals, adding to a long history of disappointments in that disease area.
- Merck KGaA lost what analysts called its strongest near-term pipeline candidate when xevinapant failed in head and neck cancer.
Each of these failures individually rattles investor confidence. Together, they reinforce a narrative that drug development is getting harder and more expensive, with no guarantee of payoff. When even Big Pharma can’t avoid expensive late-stage wipeouts, smaller biotechs with single-drug pipelines look even riskier.
Drug Pricing Rules Changed the Math
The Inflation Reduction Act, signed in 2022, gave Medicare the power to negotiate prices on certain drugs for the first time. Under the law, small-molecule drugs become eligible for negotiation 7 years after FDA approval, while biologics (the complex, lab-grown therapies that make up most of biotech’s pipeline) get 11 years before negotiations begin. The required discounts are steep, ranging from 25% to 60% off a drug’s price depending on how long it’s been on the market.
For biotech companies, this effectively caps the revenue ceiling on their most valuable products. A drug that might have generated premium pricing for 15 or 20 years now faces mandated price cuts much sooner. Investors building financial models for these companies have had to lower their long-term revenue projections, which directly reduces what they’re willing to pay for the stock today. The law also created a perverse incentive: companies focused on small-molecule drugs face negotiation two years earlier than those making biologics, nudging the industry’s pipeline decisions in ways that may not align with patient needs.
Political Uncertainty Added a New Layer of Risk
The 2024 presidential election introduced fresh anxiety for biotech investors. Research published in Finance Research Letters found that the appointment of the new U.S. health secretary triggered a negative reaction across the sector, driven by his public skepticism about vaccination and criticism of drug pricing and industry margins. The companies hit hardest were those spending the most on research and development, exactly the firms that need the longest runway and the most investor patience.
This political risk compounds the financial pressures already in place. Biotech companies now face potential headwinds from both the legislative branch (through the Inflation Reduction Act) and the executive branch (through regulatory appointments and policy shifts), making the investment case harder to build with confidence.
Layoffs Signal an Industry in Retrenchment
The financial squeeze has translated directly into job losses. In 2024, at least 192 rounds of layoffs were reported across the biopharma industry, a slight increase from 187 in 2023. Among the 86 companies that disclosed specific numbers, more than 15,100 people lost their jobs. Big Pharma layoff rounds jumped 281% compared to the prior year, reflecting that the pain has spread beyond cash-strapped startups to established companies restructuring after failed programs or preparing for lower future revenues.
Layoffs create a feedback loop. Talented scientists and executives leave the industry or become more cautious about joining early-stage companies, which slows innovation. Investors see the cuts as a sign of distress, which makes it harder for companies to raise the capital they need to avoid further cuts.
Where Biotech ETFs Stand Now
The two most widely tracked biotech funds tell a muted story. The iShares Biotechnology ETF (IBB), which leans toward large-cap names like Amgen and Gilead, has returned about 1.2% year to date with an annualized three-year return of 12.2%. The SPDR S&P Biotech ETF (XBI), which gives equal weight to smaller companies and better reflects the broader sector, shows a 3.7% year-to-date gain and an 18.9% annualized three-year return. Those numbers look respectable in isolation, but they pale next to the S&P 500’s run over the same period.
The gap between biotech and the broader market reflects every pressure described above: rates squeezing valuations, capital drying up, drugs failing, pricing power eroding, and political risk mounting. For biotech to meaningfully recover, investors will likely need to see sustained rate cuts, a healthier IPO market, and a string of clinical wins large enough to shift sentiment. Until then, the sector remains stuck in a cycle where the potential rewards are enormous but the near-term risks keep most generalist investors on the sidelines.