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Industry Funding Trends are Mixed

Although there has been a notable pullback in life sciences venture capital investment and initial public stock offerings so far in 2023, high levels of company R&D expenditures and public funding from the National Institutes of Health will persist. Life sciences companies also have roughly $200 billion in cash and equivalents on their combined balance sheets allocated for business development and mergers & acquisitions.

Life sciences company R&D expenditures have grown by an estimated 40% over the past five years. The nearly $154 billion in company R&D expenditures last year far exceeded the $21.7 billion in life sciences venture capital investment.

Figure 7: Life Sciences Research & Development Expenditures

Source: S&P Capital IQ, CBRE Research, February 2023.

Venture capital plays a pivotal role in the creation and expansion of life sciences companies. Despite a 34% year-over-year decline in annual VC funding last year to $21.7 billion, Q4 2022 recorded the first material quarterly increase in venture capital funding since early 2021 at 20%.

While evidence of abundant available capital among investors provides an element of optimism for more favorable funding in 2023, recent turmoil in the banking system may restrict greater amounts of funding for emerging life sciences company expansions.

The bulk of life sciences venture capital is allocated to companies in the top three premier life sciences markets of Boston/Cambridge, the San Francisco Bay Area and San Diego. Some commercial real estate investors have indicated that they will limit their focus to these three markets in the near-term due to current economic volatility. Nevertheless, funding for these three markets fell by 33.5% year-over-year in 2022, compared with a 31% decline for the rest of the top 10 markets tracked by CBRE Research.

Figure 8: U.S. Life Sciences Venture Capital Funding

Source: CB Insights, CBRE Research, 2022.

Figure 9 shows how the growth or decline of life sciences venture capital investments closely mirrors the rise or fall of industry employment. Based on the year-over-year change in annual venture capital investment, a slowdown in life sciences hiring should occur this year. However, Q4 2022 saw the first material quarter-over-quarter increase in venture capital funding since early 2021, suggesting a stabilization in hiring trends rather than a decline.

Figure 9: Year-over-Year Changes in Life Sciences Venture Capital Investment & Employment Growth

Source: CB Insights, U.S. Bureau of Labor Statistics, CBRE Research, January 2023.
Note: Changes in annual venture capital funding shown.

The growth or decline of life sciences venture capital investments closely mirrors the rise or fall of industry employment.
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There also has been a drop in initial public offerings (IPOs) of emerging companies. The combined value of life sciences company IPOs last year fell by 79% from 2021 but was only 27% below the pre-pandemic annual average between 2015 and 2019, suggesting that 2020-2021 was an aberration.

Figure 10: Initial Public Offerings of Life Sciences Companies by Year

Source: CB Insights, CBRE Research, February 2023.

The National Institutes of Health (NIH) is partly offsetting the recent drop in private funding with a budget of $47.5 billion for fiscal year 2023, up from $45.2 billion in 2022. Annual NIH funding has increased by 62% over the past 10 years. The top life sciences lab/R&D markets in the U.S. continue to receive the most NIH funding, led by the Greater New York metropolitan area. Seattle and Raleigh-Durham have been the fastest-growing markets for NIH funding since 2019. Johns Hopkins University in the Washington, D.C./Baltimore market remained the largest single recipient of NIH funding in 2022 with $839.9 million.

Figure 11: National Institutes of Health Funding

Source: National Institutes of Health, CBRE Research, February 2023.
Note: FY 2023 shows budget amount approved.

Figure 12: Top 10 U.S. Metros for National Institutes of Health Funding (Fiscal Year 2022)

Source: National Institutes of Health, CBRE Research, February 2023.

A flurry of mergers & acquisitions, as well as other business development deals, is expected this year as valuations for smaller companies fall and a patent cliff looms over the next several years. The amount of cash and equivalents on life-sciences company balance sheets has swelled since 2017 (Figure 13), providing the funds for more transaction activity in 2023.

Figure 13: Cash Reserves & Equivalents Held by U.S. Life Sciences Companies

Source: S&P Capital IQ, CBRE Research, February 2023.

Figure 14: Life Sciences Mergers & Acquisition Deals by Subsector

Source: CB Insights, CBRE Research, February 2023.

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