Chapter 2
Capital Markets Challenges
2024 U.S. Life Sciences Outlook
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Aside from the many positive fundamentals underpinning life sciences expansion, certain factors that are limiting company formation and growth include lower equity valuations and public offerings, as well as less venture capital funding. However, expectations that the Federal Reserve will cut interest rates in 2024 could reverse this trend.
Life sciences equity markets have remained relatively sluggish over the past two years. While the benchmark SPDR S&P Biotech ETF index fund has dropped by 51% from its peak in early 2021, as of mid-December it was up by nearly 31% from its October low. The recent improvement reflects expectations of interest rate cuts and a less-severe economic slowdown in 2024. This in turn could improve investor sentiment and activity.
Meanwhile, there were only 20 life sciences IPOs in 2023 (through November), compared with 102 in 2021.
Figure 9: Life Sciences Equity Market Trends
With regard to venture capital, annual funding as of Q3 2023 was down by 46.3% from its peak in Q4 2021. Although this pullback has not been as severe as the 52.3% decline between 2001 and 2003, it still has constrained the growth of many companies that rely on such financing and in some cases resulted in layoffs, less space usage and even company dissolutions.
However, annual venture capital funding ending in Q3 2023 increased for the first time since 2021 and was roughly 17% higher than the prepandemic average during 2018-2019 (Figure 10).
Figure 10: U.S. Life Sciences Venture Capital Funding
Nevertheless, as of mid-December 2023, venture capital investment was trending decidedly lower, likely to dampen the positive momentum in 2023. The potential decline in Q4 funding, however, is considered to be a temporary pullback as investors adjust to a potential decline in interest rates.
By comparison with the life sciences industry, venture capital funding for the tech & software services industry is down by 68% since early 2022 and is just below pre-pandemic levels (Figure 11).
Figure 11: U.S. Tech vs. Life Sciences Venture Capital Funding Trends
The recent pullback in venture capital funding has not been as severe as the one in 2001 and appears to have ended earlier (Figure 12).
The amount of venture capital expected in 2024 is difficult to predict, and an expected decline in funding in Q4 2023 suggests annual funding has not bottomed out yet. But the expectation of lower interest rates in 2024 may spark a recovery, with an estimated $10.3 billion in venture capital dry powder awaiting deployment for life sciences companies.
Figure 12: Peak to Full Recovery of Annual Venture Capital Funding
The decline in venture capital funding this cycle has been slightly greater in the top three U.S. life sciences markets (Boston-Cambridge, the San Francisco Bay Area and San Diego) than in the other 10 primary markets tracked by CBRE.
Annual venture capital funding ending Q3 2023 for the top three markets has declined by 46.5%, compared with a 45.8% decline for the other 10 primary markets combined. This is a shift from funding levels during the Global Financial Crisis when the top three markets had significantly lower funding declines (-27.6%) vs. the other 10 primary markets (-59.2%).
Figure 13: Change in Annual Venture Capital Funding by U.S. Markets by Cycle
Despite lower levels of funding and increased scrutiny of new investments, there remains an ongoing surge in the earliest venture capital investment rounds (angel, seed, pre-seed). Annual funding for these early rounds has surged by more than 300% since 2019 and although accounting for only 8.6% of all annual venture capital funding ending Q3 2023 underscores the importance that investors are placing on cutting-edge innovations.
Figure 14: Angel, Pre-seed & Seed Venture Funding for U.S. Life Sciences Companies
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