The Times They Are A-Changin'

Roger Lias & Mark Quick

“I think a lot of investors are keeping their powder dry at the moment”

These are the words of Mark Quick, Ventures Accelerated Advisory Board Member and a partner at Flerie Invest, a Sweden based VC company specializing in the Life Science sector. On of the reasons for investors “keeping their powder dry”, i.e. holding back on investments, these days is of course the economic uncertainties brought about by the new US administration and its policies.

Firstly, there are the general tariffs, which were introduced, then paused, then suggested to be reintroduced for the EU at a 50% rate even prior to the deadline, and then backed down from again only a few days later. “The main feature created by these erratic policy proclamations and retractions is of course uncertainty”, says Mark, and investors naturally shy away from increasing uncertainty, or at least they put a price increment on it. Or they simply sit on the fence, aiming to wait it out.

Apart from the general tariffs there are also the proposed US tariffs on pharmaceuticals specifically, the final outcome of which is way up in the high ranges of uncertainty. It is also more difficult to understand the rationale here, as such tariffs would only make innovative new drugs even more expensive, and it would take a very long time indeed to “onshore” drug manufacturing given the skills required and given that Life Sciences is probably one of the world’s most regulated industries.

Also, the manufacturing part of the value chain for patented drugs is relatively small in comparison to the innovation and development as well as the marketing parts, and the US already has a large stake in these, much bigger, links of the value chain for innovative drugs. This is due to the attractiveness of the US drug market and the prevalent availability of investors and enablers in the form of venture capital and arguably the best and the brightest innovators in the industry.

This topic, however, brings us to other aspects of the new US administration initiatives. The so called “DOGE” (Department of Government Efficacy) has proposed (and it would seem not only proposed but implemented very quickly) funding cuts across government spending in such a way that it affects FDA operations specifically, and grants and staffing more generally across a spectrum of institutions of significant importance for the development of drugs.

Also, the drastic and hyper-speed manner, in which these financing and staffing cuts have been administered across government funded institutions, seems to have caused further dynamic effects in terms of some senior people leaving on their own accord, on top of the intended staffing cutbacks. Naturally, this can further enhance the cost savings in the short term, but “that is of course only valuable if critical operational effectiveness is kept intact, and that seems to be quite uncertain”, says Roger Lias, Global Head of Biologics at US based professional advisory firm, Kymanox, and also a Ventures Accelerated Advisory Board Member, referring to the recent news on layoffs and flight in the FDA specifically.

This “flight behavior” is also noticeable at American universities, and the EU has announced a new well-funded program to skim the scientist community desiring to leave the US. Things are obviously in their early stages still, but the “double down” stance currently seen in the US administration to “force compliance” in scientifically revered institutions such as Harvard University, is hardly helping to stem the potential outpour of stellar academic scientists and scholars.

There is still another potential issue affecting the general investment climate, both Mark and Roger agree, and that is the threat of stagflation. This is that dreaded economic circumstance in which there is both economic recession and inflation at the same time. Economists broadly agree that a generally applied trade war, with prolific reciprocal tariffs that would almost inevitably follow, could cause such a state of affairs. And obviously in such a scenario, negative sentiments on future economic prospects could interact with increased interest rates aimed at stemming tariff induced inflation, in a manner that could significantly stifle capital availability and investments.

Still, and this is important, though these threats are real, we are still in the early days of the new US administration, and some ideas for which there is initial politically motivated gusto, might face curbed enthusiasm when confronted with the high stakes of global economic dynamics. It is important to remember that the underlying fundamentals are still fair; we have seen interest rates falling, and employment figures on the rise, coupled with a growing US economy, and a record stock market. As a European, one could even be tempted to ask what was not “great” about this.

As such, the economic turbulence we have seen recently seems to be caused solely by zealous political initiatives launched at hyper-speed, rather than a change in fundamental long-term economic factors. It is fair to describe the current economic times as turbulent, but as is the case in air travel, though one should definitely buckle up, there is no need to panic with each air pocket bump. The old British maxim “Keep calm and carry on” would seem to be appropriate advice. And now, the US Court of International Trade has ruled that the president does not have unilateral authority to impose tariffs, so perhaps we have dodged this bullet.

There is another adage that springs to mind - “never waste a good crisis”. Though economic realities might temper some of the more peculiar political initiatives, and indeed make them short-lived as we see examples of already, we should all realize that we have come from a long (pre-covid) period of extremely low interest rates and an abundance of available capital caused by this; and that is certainly a la-la-land that is no more. The interest rates we are currently seeing signify a return to normal, so dreams of a complete bounce-back to the pre-covid biotech bonanza with an abundance of inexpensive capital fueling it, will probably remain empty fantasies. Therefore, competent life science and investor companies alike will realize that also beyond the initial political passion induced initiatives that we are seeing the side effect of currently, slowly “The Times They Are A-Changin'”, and competent companies will spend their “crisis time” well, sharpening their strategies to remain competitive and upping their partnering game with greater precision. Or, put so much more eloquently by Bob Dylan himself:

Don't stand in the doorway
Don't block up the hall
For he that gets hurt
Will be he who has stalled

At Ventures Accelerated we stand ready to help you to up your game in these times of change!