Increasingly high bond rates are having important implications for the U.S. life sciences ecosystem – and underscore the role of mergers and acquisitions (M&A) and other pro-competitive partnerships in advancing innovation.
The upshot. Developing a new medicine requires significant and sustained investment over many years. This makes the life sciences industry especially sensitive to changes in the cost and availability of capital. With financial conditions tightening, a predictable environment for life sciences M&A is critical to sustaining investment in the next generation of cutting-edge treatments and cures.
Why bond rates matter. It can cost billions and take more than a decade to bring a new treatment or cure to patients. Often, these companies operate without a profit and rely on outside investment (such as venture capital) to finance this high-stakes journey. When relatively low-risk investments like U.S. Treasury bonds offer stronger returns, investors need significantly greater potential returns to justify betting on riskier, long-term investments, such as drug development.
The cost to early-stage life sciences investment. For emerging life sciences companies, less available capital can mean fewer resources to advance promising science and fewer new cures reaching patients. Research from NBER estimated that an unexpected one-percentage-point increase in interest rates reduces R&D spending across industries by approximately 1–3% and venture investment by roughly 25% over the following one to three years.
M&A as an investment incentive. A healthy M&A environment provides a critical incentive for investors to support high-risk science by offering a potential exit. The prospect of an acquisition allows investors to realize returns from financing early-stage research – and reinvest that capital in the next generation of treatments and cures.
M&A helps advance promising innovation. M&A is similarly vital to turning the promising science that attracted investment into approved medicines for patients. Emerging companies contribute specialized scientific knowledge and innovative drug candidates – but often depend on partnerships with larger, more established companies to access the clinical-development expertise, regulatory capabilities and infrastructure needed to bring medicines to patients.
The evidence reinforces this complementary relationship. Findings from Cornerstone Research show that drug projects acquired from smaller companies by firms with prior launch experience were three times more likely to launch – and five times more likely to launch as novel drugs – than projects acquired by another small firm.
A predictable pathway forward. When higher bond rates raise the bar for investing in innovation, policymakers should avoid adding unnecessary barriers to an already challenging investment environment. A predictable and balanced approach to merger enforcement can help preserve life sciences M&A as a vital pathway for transforming promising scientific discoveries into new medicines for patients.