The pharma industry is gearing up for a busier 2025. After a year marked by a smaller deal volume and right-sizing portfolios, economic conditions may be ripening for a more active M&A environment to fill gaps in research and development.
Oncology has long reigned supreme as the industry’s largest R&D bucket, but obesity drug trials are ramping up alongside bustling immunology and neurology activity in the clinic. With these four therapeutic areas likely set to reap the most R&D dollars according to recent outlooks from Deloitte and Fitch Ratings, pharmas are making focused R&D investments to offset losses from patent expirations and regulatory costs.
The internal rate of return in biopharma R&D was just 4.1% this year, according to an April report from Deloitte. Although that value is a jump from the 1% calculated in 2023, the ongoing risk of low ROI has driven many pharma companies to pursue assets in specialty and rare disease over the past few years that can carry high price tags once approved. However, fast-selling GLP-1 medications are also bringing more R&D energy back to the small molecule arena with wider patient pools.
Amid this backdrop, here are the forces shaping pharma’s approach to R&D in the coming year.
Re-aligning portfolios
The majority of biopharma executives expect revenue increases and margin expansions in 2025, according to Deloitte’s outlook, which was based on survey responses from 100 biopharma and medtech executives. That optimism is shaping R&D strategies even as leaders take a targeted approach to drug development.
“The industry is expected to refine its approach to product development, focusing on projects with shorter development times to maintain exclusivity and returns, especially for small molecule therapies,” Fitch’s outlook predicted.
Medicare drug price negotiations via the Inflation Reduction Act are placing external pricing pressures on the industry and impacting how companies pick and choose assets, according to Pete Lyons, vice chair and U.S. life sciences sector leader at Deloitte. The first 10 drugs selected for the program have already gone through the negotiation process, and Medicare will pay the new rates in 2026. Under the current IRA provision, another wave of 15 drugs will be selected next year for 2027 implementation.
“Companies are thinking: ‘As I progress my research and development strategy, do I go after things that are likely subject to IRA?’” Lyons said.
Despite outcry from the industry that the program will hamper innovation, studies have suggested the threat could be overblown. Big Pharma executives have also downplayed the impact of the price negotiations to their bottom lines.
But another challenge on the horizon in the coming years is the looming patent cliff, which is putting $300 billion in revenue at risk from loss of exclusivity through 2030, according to Deloitte. To fill the gap, pharmas will likely ramp up M&A.
“If you looked at this year through September, deal volume was down significantly by dollar amount relative to last year,” Lyons said. “There are a bunch of reasons for that — cost of capital being higher, uncertainty in the economic environment, uncertainty around the geopolitical environment.”
While not all of these issues are resolved, a vast majority of respondents in Deloitte’s outlook survey — 77% — expected M&A to increase next year. That confidence likely stems from questions, like who would be seated in the White House next year, finally being answered.
“Companies are feeling more comfortable about making some of those bigger bets,” Lyons said. “With a looming administration change, companies don't necessarily want to make those moves, and now, at least having the certainty of who's going to be in Washington helps clients make decisions.”
Regulatory barriers are also “expected to ease compared to the Biden administration,” according to a 2025 outlook from Fitch Ratings. The Federal Trade Commission has been cracking down with more regularity on mergers across the country in the past several years, and most recently requested more information from Novo Nordisk and Catalent over their proposed $16.5 billion match-up. Some pharma companies may be hanging their hopes on an easier regulatory environment under President-elect Donald Trump, but some experts believe the new administration will bring much of the same when it comes to the merger landscape.
While some barriers to deal-making like inflation and high interest rates remain, there could at least be more certainty in the market next year.
“Companies have been waiting for a while and now are poised with a little bit more stability or certainty of what’s happening going forward, [and will be] striking some of these deals because you can only wait so long to fill your pipeline,” Lyons said. “Even though the deal may cost a little bit more, if you believe in it and it fills gaps in your pipeline and in your revenue curve, you're likely to make some of those moves.”
The GLP-1 effect
With the success of weight loss and diabetes drugs from Novo Nordisk and Eli Lilly, biopharma companies are in a race to cash in on the emerging market. Several are pursuing oral GLP-1 medications in the clinic to secure a competitive edge over the once-weekly injectables currently available. And overall, R&D investments will continue to swing toward obesity meds next year.
“The GLP-1 class of drugs brought a resurgence back of focusing on large-scale, primary-care driven therapies, and that market has exploded,” Lyons said. “Even if you're number three [or] number four to that market, it's so big, it's hard to ignore.”
GLP-1s could also have far-reaching effects beyond obesity and diabetes. Novo’s Wegovy was the first GLP-1 to be approved by the FDA to reduce the risk of cardiovascular disease earlier this year The company is also studying the drug in Alzheimer’s disease, MASH and chronic kidney disease, while Eli Lilly is seeking label expansion for Mounjaro in sleep apnea and studying it in heart failure, cardiovascular health and MASH. GLP-1 drugs have already influenced sleep apnea stocks to drop this year, as obesity can worsen sleep apnea, and the drug class is likely to erode market share of other treatments as more approvals roll in.
“If these drugs continue to have the impact that they have had to date, you could see a dramatically different healthcare life sciences landscape, which would drive different investments in products,” Lyons said.
