The U.S. Biotech Liquidity Crisis

Executive Summary

A liquidity crisis is gripping the US biotechnology industry, which is significantly affecting the cash flow of 39% of biotech firms, who have a cash runway of less than one year in 2024, the maximum level in the past six years. The lack of financial resources has changed the entire scenario of the industry's financing, bringing about more opportune instances for the investors who are keen on strategies and at the same time pushing forward the use of non-dilutive finance methods, with royalty-based structures posing a strong opportunity. At the same time, these market situations are also affecting the way foreign biotech companies can enter the US market. This paper presents the current crisis's severity, outlines the new investment opportunities, and assesses the growing popularity of alternative financing methods while at the same time illustrating the impact on international biotech firms that wish to operate in the US.

A STRUCTURAL SHIFT IN BIOTECH CAPITAL MARKETS

The relationship between the biotechnology industry and capital markets has always been in cycles, but the present downturn is a shift from the past, both in the degree and duration. The capital market boom that took place in 2020 and 2021 due to loose monetary policy led to a drastic change in the biotech sector with the loss of almost 50% of the value within one year from February 2021 to February 2022. In contrast to previous corrections, the sector has not yet recovered, which is why the industry analysts label it as the worst bear market in recent history. The prolonged capital drought has brought about a major change in the funding strategies by biotech companies, and these changes would strongly impact venture capital and public equity markets. Furthermore, they have also stirred innovation in financing structures, opportunities for investors with newfound judgment in valuation, and foreign entrants to the U.S. market.

The Depth of the Liquidity Crunch

A. Cash Runway Deterioration

The financially healthy biotechnology sector has gradually deteriorated in stability through the four years. The EY's 2025 Biotech Beyond Borders report states that in 2024, 39% of biotech firms evaluated will run out of cash in less than a year, which is a rise from 31% in 2022 and 2023 and only 18% in 2021. The successive deterioration is not just a temporary funding gap but a fundamental change in the way capital flows to the sector. There is also the same level of concern for the deterioration at the other end of the spectrum. The percentage of biotech firms that have more than five years of cash has dropped from 24% in 2021 to 18% in 2024, which shows that even the best-funded companies are experiencing runway compression.

 B. The Funding Funnel Narrows

The reduction in capital availability has taken different forms over the various stages of development, where early-stage companies have suffered the most from investor rejection. J.P. Morgan reported that the number of seed and series A rounds decreased from 228 in 2024 to 191 in 2025, while the total investment at these stages fell from $10.6 billion to $8.7 billion. This dip in early-stage deal volume by 18%, along with tightening in diligence standards and draining the ostensible lengthy decision periods, has turned out to be a huge hurdle for the budding biotechnology companies. The funding climate indicates distinctly the preference for de-risked assets. In the year 2025, there were 80 venture rounds that went above the $100 million mark, and at the same time venture capital funds were favoring the assets of the later stage, which were partly de-risked by the clinical data. This pattern of escaping to the quality is the investors' intention to lessen the exposure to the risks associated with science and regulation, and to gather all the resources in the programs where a proof-of-concept has been established and confirmed. The total amount of money received from all sources in the financing sector dropped by around 10% going from 2023 to 2024, reaching a total of $73 billion based on the figures provided by EY. The downward trend was still evident in the year 2025, with investments made in the first quarter amounting to only $17 billion, which signifies that the problem of capital shortage is far from resolution.

C. Public Market Challenges

The IPO market, which has always played a key role in providing liquidity for biotechnology firms, is now open only for the most attractive stories. From 2024 to 2025, there was a significant decrease in the number of IPOs. The companies that managed to go public usually belonged to a later stage and had small valuations, which indicated that the investors' preferred risk was close to or already generating revenues.

Investment Oppurtunities

A. Valuation

While the liquidity crisis presents existential challenges for many companies, it simultaneously creates opportunities for investors with adequate capital and appropriate risk tolerance. Depressed equity valuations have opened entry points that would have been unthinkable during the 2020-2021 boom period.

The current environment rewards investors who can differentiate between companies facing temporary capital constraints and those with fundamental scientific or commercial challenges. Companies with compelling clinical data, strong intellectual property positions, and experienced management teams may be available at significant discounts to their intrinsic value simply because of sector-wide capital scarcity.

B. Licensing Opportunities

The present scenario is benefitting those investors who know the difference between companies that are just going through a financial crunch and the ones that are struggling with fundamental scientific or commercial issues. Firms with robust clinical data, strong intellectual property rights, and good management may be selling at a huge discount to their intrinsic value simply due to lack of finance in the whole sector. Biopharma companies spent $252 billion on licenses in 2025, which was an increase from $190.6 billion in 2024. The 32% rise in licensing activities indicates that drug companies are willing to pay even more for the validated assets as they are facing not far away patent expires and at the same time, they are trying to fill up their pipelines. In 2025, large biopharma companies gave an average of $185 million up front in cash and equity for Phase III drug candidates, which was a rise from $53 million in 2024. This near-quadrupling of up-front payments for late-stage assets proves the fierce competition for de-risked programs and the willingness of big pharma to pay hefty premiums to get unique treatments. However, the opportunity is there for all stages of development. While Phase I and II upfront values fell in 2025, there was an uptick in amounts paid for pre-clinical programs, suggesting that pharmaceutical companies recognize the need to establish earlier-stage positions in emerging therapeutic modalities and targets.

C. Consolidation Opportunities

The distressed condition of a lot of biotechnology firms has opened the way for mergers and acquisitions. Companies that lack cash may find acquisition terms they would have otherwise turned down in times of plenty of capital acceptable. For purchasers, especially big pharma that want to renew their pipelines, the present scenario is a chance to buy promising properties at attractive prices.

Royalty Financing

A. Market Growth and Structure

The restricted traditional funding setup has acted as a spark for the phenomenal rise of royalty financing as a non-dilutive and viable alternative. In the biopharma sector, royalty financing from 2020 to 2024 amounted to nearly $29.4 billion, which is more than twice the total amount of $14.1 billion that was raised during the years 2015 to 2019. This gob-smacking growth is a result of the combined factors of royalty capital being made readily available and entrepreneurship in the area of biotechnology looking to equity value preservation by the use of royalties. The royalty financing market has progressed past its traditional confines. The annual volume of rights deals is projected to be around $14 billion, thus, giving the market one more reason to be non-dilutive funding option that is less sensitive to the fluctuations of the wider capital markets. The deal-making activity in rights alone for the year 2025 is expected to hit an all-time high of $5.42 billion and that is 7% higher than the $5.07 billion seen in 2024. This indicates that the market is still very active despite the conditions.

Traditional royalty financing involves the monetization of existing royalty streams from out-licensed assets. A company that has previously licensed its technology to a third party can sell its anticipated future royalty receipts to an investor for their risk-adjusted net present value. This structure is most applicable to companies with established licensing agreements generating or expected to generate ongoing royalty income.

B. Advantages and Considerations

Royalty financing offers several compelling advantages in the current environment:

• Non-Dilutive Capital: Unlike equity financing, royalty transactions are non-dilutive for existing shareholders, critical when equity valuations are depressed. For companies concerned about raising capital at unfavorable valuations, royalties provide an alternative that preserves ownership percentages.

• Market-Independent Returns: Royalty financing terms are driven by product potential and commercial realization, not overall equity markets or interest rate environments. This shield from broad market volatility makes royalty financing particularly attractive during uncertain periods.

• Flexible Structures: Royalty transactions are often specific to individual companies, with variation in upfront payments, milestones, rates, and lengths. This allows companies to optimize financing terms based on their unique risk/return profiles and capital needs.

However, companies must carefully evaluate the long-term implications of royalty financing. Selling future revenue streams at significant discounts to net present value can have an underestimated impact on long-term profitability. Companies that give up too much future revenue for insufficient upfront payment may find themselves constrained even if their products are a commercial success.

C. Key Players and Market Dynamics

Historically speaking, the three companies—Royalty Pharma, HealthCare Royalty Partners and Blackstone—have been the ones that practically accounted for the entire royalty financing market, as they collected 70% to 80% of the royalty dollars, on an average, during the last couple of years. Nonetheless, the market is progressing with the arrival of new players, growing competition, and a possible shift in terms that will be more favorable for biotech firms. The growth of the investor base bears multiple consequences. A higher number of market participants typically results in a price war, which is a winning situation for biotech companies looking for funds. Moreover, different royalty funds might be open to different levels of risk, might have different areas of expertise and might have different styles in structuring deals, which gives companies a wider selection of potential partners.

D. Milestone-Heavy Structures

The analysis reveals a shift towards performance-based payments, which are beneficial to both parties, i.e., buyers and sellers. Performance-based payments are those that are linked to the achievement of specific development or commercial milestones and thus, they are viewed as a risk-reducing strategy for the buyers and a source of cheaper capital for the sellers. This type of transaction is known to create a win-win situation in terms of investor and company interests as the payment will be partly dependent on the accomplishment of certain milestones. The company sees it as a way to have cash upfront but through the milestone structure gets to keep the chance for more funding as the risk of the asset is reduced. The investor on the other hand, will have to pay less at the start and will be able to see if the asset is getting more confidence and then gradually increase his investment.

Implications for Foreign Biotech

A. Market Entry
The current U.S. liquidity crunch presents both challenges and opportunities for foreign companies:

• Talent & Costs: Senior scientific talent is scarce, representing less than 3% of the biotech workforce. U.S. compensation packages often exceed international norms by 40–70%, making recruitment competitive. Operational and regulatory costs are also high, requiring careful financial planning.

• Partnership & Acquisition Opportunities: Cash-strapped U.S. firms may be open to licensing, joint ventures, or acquisitions at favorable valuations. Well-capitalized foreign entrants can leverage these opportunities to acquire high-quality assets or form strategic alliances.

B. Regulatory & Strategic Considerations
Understanding FDA requirements, IP protections, and clinical standards is critical. Early regulatory engagement and compliance are essential for approval and investor confidence.

• Case Study: Chinese Biotech
  In 2024, Chinese firms launched 336 multi-regional clinical trials, projected to exceed 400 in 2025, and completed 94 licensing deals worth $51.9 billion. The FDA’s approval of Sunvozertinib from China-based Dizal Pharma highlights foreign firms’ technical capabilities and regulatory compliance.

C. Strategic Takeaways
Foreign companies should:

1. Build local teams familiar with U.S. regulations and investor expectations.

2. Leverage home-market strengths to complement U.S. operations.

3. Time entry strategically to balance liquidity-driven opportunities with long-term positioning.

4. Explore non-traditional financing—royalties, milestone deals, or co-GP structures—to preserve equity and mitigate risk.

By combining strategic partnerships, local expertise, and innovative financing, foreign biotech firms can navigate U.S. market challenges while capitalizing on liquidity-driven opportunities.

Conclusion

The liquidity crisis that has engulfed the US biotech sector has not only posed a challenge but also opened the door for changes to be made to the existing structures. Almost 40% of companies are at risk of running out of cash in less than a year, the whole industry is experiencing an enormous financial burden which has never happened before in recent times. The scarcity of capital has caused the financing dynamics to change completely, with the resources being concentrated on late-stage or de-risked assets, while the funding of early-stage innovations is very difficult to come by.

On the other hand, the situation does generate some significant opportunities at the same time. The distressed valuations allow strategic investors and pharmaceutical companies planning to access the pipeline to come in at lower prices. The rapid growth of royalty financing, which is expected to be double from the 2015-2019 to the 2020-2024 period, is a clear indication of the industry's readiness to innovate financially even when the sources of traditional capital are dry. It would be a buyer's market for cash-rich companies looking to acquire and the price of the asset’s positions would be favorable too. For foreign biotech firms, the US market entry is a tricky decision to make. Although America is still the gate to the world if a company wants to sell its products globally, the current situation makes talent, costs, and financing more difficult than ever. The financially strongest companies might be able to find good acquisition deals, while those looking for a partner might be able to get a good deal with a cash-strapped US company. Foreign companies must understand the unique dynamics of the US market and build local capabilities while leveraging their home market strengths.

The current liquidity crisis will eventually resolve, either through renewed investor confidence driving capital back into the sector or through consolidation reducing the number of companies competing for finite resources. In the short-term, success will favor companies and investors who recognize that traditional approaches may be insufficient and who embrace the creativity and discipline the current environment demands.

Sources: BioSpace, Biotech Briefings - Gibson Dunn,  DCAT, Royalty Pharma, BioBridge Global, LabioTech